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(Bloomberg) — Commodities including oil and copper are at risk of steep declines as recent advances aren’t fully grounded in improved fundamentals, according to Barclays Plc, which warned that prices may tumble as investors rush for the exits.

Copper may slump to the low $4,000s a metric ton, from $4,945 in London last week, while oil could fall back to the low $30s a barrel, analyst Kevin Norrish said in a note. The risk for raw materials is that investors seek to liquidate bets on gains quickly and in unison, with potentially highly negative consequences, Norrish wrote.

“Investors have been attracted to commodities as one of the best performing assets so far in 2016,” he said in the March 28 report. “However, in the absence of any concerted fundamental improvements, those returns are unlikely to be repeated in the second quarter, making commodities vulnerable to a wave of investor liquidation.”

Commodities are headed for a quarterly advance amid speculation that prices may now be bottoming after they slumped 11 percent in the final three months of 2015 and 14 percent in the third quarter. Oil and copper have recovered from multiyear lows seen in the January and February, and Barclays estimated net flows into commodity products totaled more than $20 billion in the two-month period in the strongest start to a year since 2011. 

‘Risk Is Growing’

“Given that recent price appreciation does not seem to be very well founded in improving fundamentals, and that upward trends may prove difficult to sustain, the risk is growing that any setback will result in a rush for the exits that could again lead commodity prices to overshoot to the downside,” he said.
Investors were increasingly taking short-term bets on raw materials, not the long-term buy-and-hold strategy for diversification and inflation protection that underpinned inflows in the previous decade, he said. In addition, as commodities are among the few assets that have risen in the first quarter, that may make investors keener than usual to close out bets on gains, he said.

“Key commodities markets such as oil and copper already face overhangs of excess production capacity and inventories, but also now face another obstacle in the recovery process, that of positioning, which is now approaching bullish extremes,” Norrish said.

To contact Bloomberg News staff for this story: Jake Lloyd-Smith in Singapore at jlloydsmith@bloomberg.net To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net Jake Lloyd-Smith, James Poole