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Outlook for Commodities to end-2006: The Experts' View

The Dow Jones-AIG Commodity Total Return Index is down -4.2% over the last 12 months, but up 87.5% for the past five years. A panel of leading market experts assembled by Dow Jones and AIG examine the outlook for commodities.

Oil price likely to remain on high levels
'The options market has become too complacent towards the dangers of an oil price spike looking into the upcoming months and 2007. OPEC remains in a powerful position to protect oil prices to the downside. The implications of aggressive oil production cuts by OPEC if, and when they come are a possible switch from contango to backwardation in the crude oil term structure, an elimination in the negative roll yield and further downside to the wet freight market. In addition, a resumption of US dollar weakness will also play into the hands of keeping oil prices high. In general, the flattening in energy forward curves has is also expected to migrate into other parts of the commodity complex due to tightening inventory positions,' assessed Michael Lewis, Global Head of Commodities Research at Deutsche Bank.

Return of investor-led rally forecast to lift gold over USD 700 before year end though potential for shorter term softness still exists
'The gold price could well track higher, clearing USD 700 before year-end driven mainly by a return of significant investor buying. For 2007, prices could rise yet further, particularly if we were to see a major event such as U.S. military action against Iran, for example. Nevertheless, longer term price strength is not guaranteed by any means. Widespread price corrections across the commodity spectrum might occur due to an economic downturn in the U.S. and China, but gold could see a 'flight to quality' resulting in prices being sustained for a while.

The main area of weakness over the first half of the year was jewelry demand but, now that prices have retreated, jewelry off-take is providing a firm base as pent-up demand emerges and through a refilling of the jewellery pipeline,' said Neil Meader, Senior Metals Analyst at GFMS.

Increased investor interest in agricultural commodities spurred by China's growing demand and growth in the biofuels industry
'The vast and far-reaching economic changes occurring in China, including industrialization, rural-urban migration and higher living standards have spurred commodity demand in general. Chinese demand has risen strongly over the past few years for most agricultural commodities, albeit in some markets from low levels. Higher per-capita income and changed diets have led to robust soft commodity consumption, while rising protein and meat demand has galvanized feed markets. Increased Chinese demand and imports in our view will materially impact the agricultural markets, supporting prices and altering both demand and supply dynamics. Further, high and volatile oil prices in conjunction with geopolitical tensions have highlighted the need for alternative fuel production. Key among these alternative fuels is ethanol, made from sugarcane in Brazil and from corn in the US. The bio-fuels sector looks poised to grow tremendously over the coming years and one by-product of this has been the resultant effect on certain agricultural markets, sugar and corn being the most prominent, with a close causal relationship with ethanol and we expect this new demand aspect to certain agricultural commodity markets to provide support to prices going forward,' commented Sudakshina Unnikrishnan, Commodities Analyst at Barclays Capital.

Investors continue to consider commodities for portfolio diversification
'Commodity futures markets have attracted increased investor interest this year, with amounts allocated to long only commodity strategies continuing to grow significantly over the last twelve months.  As of the end of the second quarter of 2006 there was an estimated USD 30 billion tracking the Dow Jones-AIG Commodity Index on a global basis, which was approximately double the amount compared to the previous year. Institutional investors have continued to look to the commodities markets as a tool for portfolio diversification, with long term studies indicating low correlation to equities and fixed income markets,  and positive correlation to inflation.' said Daniel Raab, managing director of AIG Financial Products Corp. in New York. 

Background note: The Dow Jones-AIG Commodity Index, a diversified and highly liquid benchmark for the commodities markets, is composed of futures contracts on physical commodities and was introduced in 1998. The 19 commodities currently in the Dow Jones - AIG Commodity Index are: aluminum, cattle, coffee, copper, corn, cotton, crude oil, gold, heating oil, hogs, natural gas, nickel, silver, soybeans, soybean oil, sugar, unleaded gas, wheat and zinc.

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