‘Oil price could slide to $30’ amid wider commodities slump

Commodities including oil and copper are at risk of steep declines as recent advances aren’t fully grounded in improved fundamentals, according to Barclays, which yesterday warned that prices may tumble as investors rush for the exits.

Copper may slump to the low $4,000s a metric ton, from $4,945 in London last week, while oil could fall back to the low $30s a barrel, analyst Kevin Norrish said in a note.

The risk for raw materials is that investors seek to liquidate bets on gains quickly and in unison, with potentially highly-negative consequences, Mr Norrish wrote in the note entitled “Buffalo Jump,” a term that describes a cliff where Native Americans herded bison to their death.

“Investors have been attracted to commodities as one of the best performing assets so far in 2016,” he said in the report.

“However, in the absence of any concerted fundamental improvements, those returns are unlikely to be repeated in the second quarter, making commodities vulnerable to a wave of investor liquidation.”

Commodities rebounded from a more than 25-year low in January amid speculation that prices may now be bottoming after they lost 11% in the final three months of 2015 and 14% in the third quarter.

Oil and copper have recovered from the multi-year lows seen in January and February, and Barclays estimated net flows into commodity products totaled more than $20 bn in the two-month period in the strongest start to a year since 2011.

Investors were increasingly taking short-term bets on raw materials, not the long-term buy-and-hold strategy for diversification and inflation protection that underpinned inflows in the previous decade, he said.

In addition, as commodities are among the few assets that have risen in the first quarter, that may make investors keener than usual to close out bets on gains, he said.

Both Brent and US crude oil pirces were down yesterday, at $39.07 and $38.07 per barrel, respectively.

“Key commodities markets such as oil and copper already face overhangs of excess production capacity and inventories, but also now face another obstacle in the recovery process, that of positioning, which is now approaching bullish extremes,” Mr Norrish said.