A widespread selloff of oil, copper and other key commodities is signalling that investors have seen the top of the current cycle and are taking profits amid increasing concerns about a slowdown in global economic growth.
Oil prices fell sharply for a second day Tuesday, prompted by fears that high prices are beginning to erode demand for the crucial commodity.
Prices also fell Tuesday for commodities such as copper, corn and wheat amid a cut in growth forecasts for the United States and Japan, two of the world's three largest economies.
But the main worry is that China, the world's second-largest economy and top commodities consumer, faces a slowdown as the country takes measures to cool its red-hot economy.
"We now anticipate a slowdown in global growth," said a team of UBS analysts in a note to clients. That will squeeze consumers and, in turn, "is set to trigger a lull in commodity demand."
Investors fear a repeat of the 2008 economic meltdown when resources prices peaked before tumbling to historic lows in a matter of weeks as demand dried up and supplies increased.
A global economic slowdown this time around is expected to be more measured, geared down by lacklustre Chinese demand and a growth setback in Japan after it was devastated by last month's earthquake, tsunami and continuing nuclear crisis.
Investor confidence appears to have turned this week after influential commodity bull Goldman Sachs advised its clients to take profits on resources such as oil and copper, both of which are considered strong indicators of economic growth.
"We expect the oil market will experience a substantial pullback," Goldman said, citing "nascent signs of oil demand destruction" from higher prices.
Copper is also vulnerable to slowing demand, Goldman said "as high prices and tight credit motivate tight inventory management from key consumer China." Higher oil prices will also translate into "negative demand shock" for metals like copper, Goldman said.
The warnings come alongside statements this week from key forecasters such as the International Energy Agency and International Monetary Fund, both of which said higher oil prices are beginning to weigh on the global economy. The Organization of Petroleum Exporting Countries is also pointing to the risk that higher oil prices will crimp demand for the commodity.
The cautionary forecasts led oil prices to their biggest two-day loss in 11 months this week. The price of crude traded in New York slid more than 3 per cent, bringing losses since Friday to 5.8 per cent. Goldman predicted Brent prices would fall back to $105 (U.S.) a barrel in "coming months," down from $120 on Tuesday.
Brent crude, a European benchmark, and West Texas intermediate, North America's benchmark, have both climbed to 36-month highs in recent weeks. Brent is nearing $126 a barrel, while WTI hovered around $112 earlier this month.
Scott Saxberg, chief executive officer of Crescent Point Energy Corp. expects the price of oil to jump up and down by about $20 a barrel or more as long as there is unrest in major oil-producing regions such as North Africa and the Middle East.
During the Iraq war, he noted, oil fluctuated by about $5 to $10 a barrel, but this time the changes will be amplified.
"I think you're going to see these bigger swings in commodity price with that conflict [in Libya and other parts of the region]dragging out, and it is going to drag out a lot longer than anyone anticipated," he said Tuesday.
The IMF cut its growth forecast for the United States to 2.8 per cent from 3 per cent, citing higher oil prices. Its forecast for Japan was also chopped to 1.4 per cent from 1.6 per cent owing to the impact of its natural disasters and nuclear crisis. The Japanese government is now warning damage could be worse than expected.
China, meanwhile, is expected to curb imports of copper and other industrial commodities as it tries to stabilize inflation.
With files from Reuters