Analysts Bullish On Commodities In 2011 (JPM, GLD, OIH, DBA)

Commodity markets opened the year with a bang amid rising optimism about the health of the global economy. Crude oil futures breached $92 a barrel, and wheat closed above $8 a bushel. Both hit two-year highs on Monday, the first trading day of 2011, setting the tone for what is expected to be a year of strong commodity price performance. Copper, a bellwether for the manufacturing sector, edged up to set its third consecutive daily record. “There's a global optimism that's out there,” said John Kilduff, a partner at hedge fund Again Capital. “Part of the reaction is going to be higher commodity prices.” Analysts forecast that the momentum gained in the second half of 2010 will carry into 2011 thanks to growing worldwide demand, strains on supplies, and interest in the assets class, which has been embraced by mainstream investors over the past decade. Monday's trading was thinner than usual and strongest in the U.S., with markets closed across much of Asia and Europe. Futures markets were closed for coffee and sugar, which posted some of the sharpest gains in 2010. While China has become a major force in commodities due to its rapid growth, attention is turning back to the U.S. Not only is the U.S. the world's largest economy, it is still the biggest consumer of crude oil and a significant user of industrial metals. Stubbornly high unemployment and the struggling housing market kept certain commodities, including oil, in check for much of 2010. But strong holiday sales in the U.S. may herald consumers' willingness to accept price increases on clothes and other goods, pointing to sustained high prices for commodities like cotton. Several reports Monday offered more reasons for optimism. The Institute for Supply Management (ISM) said its December index of manufacturing activity climbed to 57.0 from 56.6 in November. Any reading over 50 indicates growth. U.S. construction spending rose for a third consecutive month in November; and this increase beat expectations, according to Dow Jones Newswires. The upbeat construction data helped copper futures lock in their third consecutive record settlement price on Monday. Investors consider construction data an indicator of future copper demand as the red metal is widely used in plumbing and electrical wiring for both residential and commercial construction projects. The most actively traded contract, for March delivery, ended up 0.02%, or 1.05 cents, at $4.4575 a pound. More important than any single data point is the growing sense among investors that the long-awaited pickup in the U.S. economy has finally arrived. The gains in commodities were part of a general embrace of riskier markets, with the Dow Jones Industrial Average (DJIA) shooting up 1.2% to a record 11,711.50. “It makes little sense to dissect the news of the day, the focus will be firmly on broad themes and the outlook for the year ahead,” said energy analysts with JPMorgan Chase & Co. JPM in a research note. The energy analysts reiterated their call for oil prices to hit $100 a barrel, “sooner rather than later.” Crude oil futures on Monday settled up 0.2% at $91.55 a barrel, the highest close since October 2008. Futures traded as high as $92.58 a barrel. Large oil consumers are expected this year to draw on surplus inventories built up during the downturn, which should help bring global supplies back to normal levels and support higher prices. Certain agricultural markets are facing an outright supply crunch, particularly with wheat. Australia, a major wheat exporter, is experiencing massive flooding that threatens its harvest. The rains come after extreme drought damaged Russia's crop last summer, and dry weather may affect output in the U.S. and China as well. Wheat futures for March delivery closed up 1.4% at $8.055 a bushel, a 28-month high on the Chicago Board of Trade (CBT). February gold futures ended 0.1% higher at a record $1,422.90, though the metal is struggling to stay in positive territory as the rosier economic picture sent money into other markets. The commodities rally is likely to be further helped by the increase in trading activity that often accompanies the start of the year. Trading volumes fell sharply during the final weeks of 2010, as many firms closed shop for the holidays. “Most people feel the economy's turn around going to have a better year in 2011,” said Michael Gross, broker and futures analyst with OptionSellers.com. GLD OIH DBA