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Commodities Market Correction Expected

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The Associated Press

Published: July 24, 2008

NEW YORK - Only a month ago, sizzling commodities prices seemed destined to soar higher with record-breaking rallies in crude oil and corn. But the boom appears to be taking a breather, cooled by a weakening economy and a milder Mother Nature.

In seven trading days, oil has lost more than $20 a barrel, or 14 percent, as record energy prices eat into demand. Meanwhile, corn has fallen 21 percent, soybeans 12 percent and wheat 8 percent since the start of the month, as ideal farming weather boosts Midwest crops battered by recent floods. Even gold, a bellwether of the commodities boom, has lost ground, falling 6 percent in the past week.

Commodities turned even lower Wednesday in the second straight sell-off. Silver, copper and wheat all traded lower. So is the commodities bubble about to burst?

Analysts aren't ready to go that far, noting that such statements in the past proved premature. But most concede that the steep drops in energy, grains and precious metals at least signal a slowdown in the frenetic futures markets - possibly providing much-needed relief for consumers struggling to cope with soaring prices at the pump and in the grocery aisle.

"Commodities in general have cooled a bit," said Darin Newsom, analyst with DTN in Omaha. "We had such an enormous run, and big rallies lead to corrections. The great question is whether it's long term or short term."

He noted that the seemingly relentless drive in commodities - crude oil and corn have doubled in the past year - was built largely on robust demand for raw materials, especially in fast-growing economies in China and the Middle East. A weakening U.S. greenback fed that demand by making dollar-denominated commodities cheaper to overseas buyers.

But with record energy prices and soaring costs for other commodities, "a lot of that demand has died out," Newsom said.

In recent weeks, analysts say, large funds have begun pulling money out of commodities as slowing economic growth has led to drop-offs in buying everything from copper used in industrial wiring to steel used in skyscrapers and airplanes.

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