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Commodities fall, but recovery seen

LONDON - Economic and demand uncertainty hit commodities across the board on Tuesday, but fund managers say correction was inevitable, especially for oil, and prices will rebound.

High profile crude oil, under the hammer from rising OPEC supplies and falling demand in Europe and the United States, the world's largest consumer, was down nearly $2 a barrel at $119.57 a barrel at 1054 GMT.

That is a loss of about 18 percent since a record high of $147.27 a barrel on July 11.

Moves by the U.S. Congress to rein in speculation in crude oil markets helped to accelerate the sell-off.

"There is the threat of legislation to stop speculation ... weak economic data and signs of demand destruction in the United States," Andrew Cole, asset allocation director at Baring Asset Management, said, while viewing the sell-off as a correction.

"We remain overweight energy, prices need to stay high for longer in order to attract the capital investment to make sure supply is there for the next 5/10/30 years."

Analysts say many investors, including hedge funds, are now short -- bets on lower prices -- of oil and that prices could jerk back up when these positions are squared.

Many are using listed exchange traded funds (ETFs).

"Investors got back on the short-oil bandwagon last week, buying a total of $34 million of ETFS Short Crude Oil," ETF Securities said in a note.

China cannot compensate

The scale of the retreat from commodities can be seen in indices such as the Reuters-Jeffries CRB commodity index, which fell to a 3-month low of 401.85 index points on Monday, a loss of 15 percent since a record high above 473 on July 3.

Concern about slowing demand from U.S. auto makers has hit platinum prices, which fell to a six-month low of $1,529 an ounce from $1,551/1,571 on Monday.

Platinum, which hit a record high of $2,290 on March 3, is used in autocatalytic converters to clean car emissions.

"The U.S. automobile market is on the downturn," precious metals group Heraeus said in a note.

"Due to its specific structure in terms of size and engine capacity, the losses there cannot be adequately compensated in better developing markets, i.e. Eastern Europe and China."

Meanwhile, gold fell to $881.80, its lowest since June 25. The precious metal used by investors as a safe place to park their funds, has lost its appeal as an inflation hedge.

The stronger U.S. currency, which makes commodities priced in dollars more expensive for holders of other currencies has also hit gold-market confidence, analysts said.

Olympic shutdowns

However, a statement from the U.S. Federal Reserve later on Tuesday, together with an interest-rate decision, could shed light on the outlook for the dollar.

"The market consensus is expecting the Fed to keep rates on hold, but the accompanying statement might move markets," Dresdner Kleinwort consultant Peter Fertig said.

Benchmark copper on the London Metal Exchange touched $7,530 a tonne, the lowest since early February. The metal used in power and construction has lost more than 15 percent since an all-time high of $8,940 in early July.

Losses are mainly due to expectations of slower demand growth from top consumer China, where growth may be coming off the boil, partly because of the Olympics.

"They have been shutting down parts of the economy ahead of the Olympics in order to try and clean up the atmosphere ... That is likely to distort data for some months," Cole said.

"Our sense is that at some point China is likely to put its foot back on the accelerator."

In agriculture, European wheat hit an 8-month low, while U.S. soybeans fell to 3-month lows.

Soft commodities such as ICE cocoa and London sugar also came under pressure as investors cut their holdings, but London Robusta coffee was seen supported by consumers looking for bargains.