Investors re-evaluating commitment to commodities

Investors are re-evaluating their commitment to the historically volatile commodities sector.

NEW YORK (Reuters) - 

Commodity investors whose bullishness helped push markets to record highs in the first half are rethinking how much to commit to a historically volatile sector that has largely gone one way of late: up.

 Investors in raw materials futures ended the second quarter with some of their best gains in 35 years, thanks to a 40 percent jump in crude oil prices and new highs set in just about every commodity from gold to copper, corn and soybeans.

 But with crude prices, some metals and agricultural futures softening this week, the correction could deepen if investors continue to see less upside potential in these markets in the second half, analysts said.

 "If forced to pick, we would take our chances on the short side," Edward Meir, a New York-based analyst at MF Global, the world's largest retail broker of commodities, said in a commentary on crude oil Wednesday.

 This week's data from the Commodity and Futures Trading Commission showed investors reducing their long, or bullish, positions in oil or other commodities or even taking short, or bearish, positions.

 Crude oil speculators on the New York Mercantile Exchange, or NYMEX, cut their net long position by almost 3 percent in the week to July 1 after straight record highs in three sessions from June 26-30, CFTC data released on Monday showed.

 NYMEX crude <CLc1> , which surged from below $100 a barrel at the end of 2007 to a record of just under $146 last Thursday, has fallen almost $10 in the last two sessions. It rebounded $2 in Wednesday's early trade on geopolitical risks linked to Iran's missile tests, before scaling back on data showing a sharp build in U.S. gasoline supplies. [O/R]

 "In light of the negative environment that seems to be blanketing a number of commodities in recent days, we suspect that energy still has further room to fall," Meir said.

 Adam Sarhan of New York's GlobalMacroResearch.com agreed.

 "A lot of these moves are structured like a stairstep, where they rally a bit, consolidate, then rally again," Sarhan said. "If you're in a situation where you have a nice profit, you're going to want to walk them in. The last thing you want is to go round trip on a trade where you have a big winner, only to sit and watch it go all the way down."

 DOLLAR STRENGTH CLOSELY WATCHED

 Most investment banks have forecast that oil could trade between $150 and $200 a barrel in coming months due mainly to supply insecurities. But they also think world demand for energy could decline sharply at such prices.

 "We believe at that point, we will start to see more signs of demand destruction and an eventual tipping point in oil markets," Deutsche Bank said in a late-June commentary that put a more conservative average of $120 for crude this year.

 Investors in industrial metals like aluminium and copper were turning cautious too, judging from the way such markets were retreating from recent highs, MF Global's Meir said.

 Aluminium <MAL3> on the London Metal Exchange, or LME, has lost around 7 percent since hitting a record peak of $3,327 a tonne Monday. LME copper <MCU3> has fallen 9 percent since an all-time high of $8,930 a tonne on July 2.

 On the agricultural front, corn has fallen more than 10 percent and soybeans 5 percent from recent record highs on the Chicago Board of Trade as more favorable crop weather came to the U.S. Midwest after spring rains delayed planting.

 Investors in commodities also were closely watching the dollar, which has been recovering on signs that there may be relief for the U.S. credit crisis in the long term.

 The dollar has strengthened this week despite a recent rate hike by the European Central Bank which briefly propped up its rival, the euro.

 Weakness in the U.S. currency has been one of the main supportive elements for the bull run in commodities as prices of dollar-denonimated raw materials rise each time the greenback falls.

 "The dollar will surely play a big role on where commodities go from here," said Steve Platt, a veteran futures analyst at Chicago's Archer Financial Services. "The markets are still going through what I think is an adjustment phase."

  (Editing by David Gregorio)

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