Commodities Heading for a Third Quarterly Advance on Recovery, Oil's Surge

Commodities headed for a third quarterly advance as the global economy extended its recovery, and as crude oil climbed on concern that conflict in Libya and unrest in the Middle East would curb supplies.

Raw materials measured by the Standard & Poor’s GSCI Spot Index of 24 futures increased 0.2 percent to 712.61 at 1:42 p.m. in Singapore, extending its gain to 13 percent this year. Oil jumped 15 percent, cotton increased 35 percent, silver gained 22 percent and lean hogs rose 28 percent in the past three months.

Fighting in Libya, the toppling of leaders in Tunisia and Egypt and protests in countries from Bahrain to Syria drove crude oil past $100 a barrel this year. Floods in Australia and dry weather in China threatened crops, while Japan’s worst earthquake on record spurred speculation of increased commodity demand for rebuilding and food. That offset concern over a potential growth slowdown in China, the biggest commodity user, as the government seeks to tame inflation.

“We had a significant change in the overall environment, with some unexpected introduction of external risk,” said Yingxi Yu, Barclays Capital’s commodities analyst in Singapore.

Oil climbed 0.3 percent to $104.56 a barrel today, heading for its third quarterly increase on concern supplies will be reduced by an escalating conflict in Libya. Troops loyal to Libyan leader Muammar Qaddafi forced rebels to retreat as the U.S. and U.K. said they would consider arming opposition forces.

Military Action

Commodities will “attract inflows” on strong emerging market growth and inflation risks and as investors seek to hedge against “tail events” such as military action in the Middle East and Africa and the nuclear accident in Japan, Michael Lewis, head of commodities research at Deutsche Bank AG, wrote in a quarterly report yesterday.

Gold for immediate delivery jumped to a record $1,447.82 an ounce on March 24 and silver surged to a 31-year high of $38.165 an ounce as investors sought precious metals to protect their wealth from geopolitical risk and rising energy costs. Gold traded at $1,427.65 and silver at $37.6850 today.

“The big picture is that the global economy is continuing to recover,” Pu Yonghao, Hong Kong-based chief investment strategist at UBS Wealth Management, said in a Bloomberg Television interview. “Emerging markets continue to remain strong although inflation is a problem.”

The LME index of six industrial metals is up 0.9 percent this year, led by tin. The metal increased to a record $32,799 a metric ton on Feb. 15 and copper touched an all-time high of $10,190 a ton on expectations supply will trail demand.

Slowdown Risk

Crude oil prices at more than $100 a barrel, the potential for further monetary tightening in China and the debt crisis in Europe may weigh on the global recovery, analysts said.

“We’re already starting to see some demand destruction,” said Francisco Blanch, Bank of America Merrill Lynch’s head of commodities research.

China’s central bank boosted banks’ reserve-requirement ratios eight times and raised interest rates three times since the start of 2010 to cool the economy and tame inflation. The People’s Bank of China may raise interest rates again in early April, according to Citigroup Inc.

“If China over-tightens and this leads to a faster than expected slowdown, there is some downside risk but it shouldn’t be overstated,” said Barclays’s Yu. Europe’s “economy is not on a strong footing and the sovereign debt issue is not over.”

The debt crisis which began in Greece persists as Portugal had its credit rating cut this week, after the country’s parliament rejected a deficit-cutting plan, sparking the resignation of Prime Minister Jose Socrates on March 23.

In Ireland, top finance officials will today seek to show investors, taxpayers and the rest of the euro region that the banking crisis in the country might be nearing an end.

Central Bank Governor Patrick Honohan will publish the results of a third round of stress tests on the country’s banks at 4:30 p.m. in Dublin. Shortly afterwards, Finance Minister Michael Noonan will set out how more capital will be raised.

To contact the reporter on this story: Glenys Sim in Singapore at gsim4@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@Bloomberg.net