As commodities surge, speculators’ role is in focus again

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With prices of oil, copper, soybeans and other commodities up sharply this year despite the still-struggling global economy, the proverbial evil speculator is getting the blame -- or the credit, depending on your perspective.

A common view is that commodity prices have far outrun the fundamentals because speculators are piling on, taking the markets where they don’t deserve to go, and at consumers’ expense.

Sound familiar? That also was an issue of heated debate in the first half of 2008 as oil shot from $92 a barrel to a record $145 by July 3.

In the energy market, ‘In a strange way, this June is giving us a horrifying instance of deja vu, bringing back memories of the move a year ago,’ wrote Peter Beutel, head of energy consulting firm Cameron Hanover Inc., in a report this week.

‘We may ‘only’ be approaching prices half of those seen a year ago, but the move seems every bit as unjustified,’ he wrote.

Near-term oil futures closed at $68.55 a barrel on Tuesday, up 54% year to date. Copper, at $2.30 a pound, is up 63% for the year. Soybeans have risen 23% this year to $12.09 a bushel.

Speculators run amok? Maybe. But we can say the same thing about the rallies in global stock markets, the junk bond market and many foreign currencies this year. The gains in those markets have flummoxed many investors -- mainly, those who have stayed on the sidelines.

In the case of commodities, analysts try to predict prices based on fundamental demand, meaning consumption by the end users of the raw materials. If too many speculators are along for the ride -- with no intention of actually consuming a commodity -- that’s typically considered phony (or at least unsustainable) demand.

But one role of speculators is to anticipate end-user demand. That’s clearly an element of the commodity rally this spring: Some buyers see fundamental demand rising in the second half of the year, assuming the economy improves. (For some raw materials evidence of a turn in end-user demand already is visible.)

That’s no different from stock investors anticipating a turnaround in corporate earnings. Except, of course, that nearly everyone likes rising stock prices; not so higher prices at the gas pump or in your cereal bowl.

As in the first half of 2008, some global commodity buyers this year have another motivation: With the dollar weakening they’re looking to hedge against a continued devaluation of the greenback. That is a natural role for hard assets.

Is that fundamental demand? Not in the classic sense of consumption by an end user. But Phil Flynn, a veteran commodities analyst at Alaron Trading in Chicago, asserts that critics of speculators and hedgers need to expand what he says is ‘a very limited definition of what fundamentals are.’

If commodity buyers are reacting to the threat of a sliding dollar, he says, that’s a fundamental issue to them.

-- Tom Petruno