By Barani Krishnan and Eric Onstad
NEW YORK/LONDON (Reuters) – Commodity markets shot higher for the second time in three days on Tuesday, with oil prices leading the way as they posted one of their biggest, broadest rallies ever as bellicose rhetoric from Iran stoked Mideast supply worries.
The explosive performance across the raw materials came despite a flat dollar and tepid gains in U.S. equities. Investors appeared to bet that markets like copper and gold offered greater upside in the event that central banks take further action to boost growth.
Grains extended their biggest surge in years as a deepening drought threatened crops in the U.S. Midwest.
Saber rattling from sanctions-struck Iran helped spark the rally. Growing hopes for Western stimulus added fuel to the market ahead of Thursday’s European Central Bank policy meeting, which is expected to cut interest rates by a quarter percentage point.
But not everyone was convinced the run up would continue after two days of unusually dramatic trade. Volumes were mixed, however, with Brent crude turnover more than a third above its norm and near a record high, but corn and gold tepid ahead of the July 4 U.S. holiday.
U.S. markets will be closed on Wednesday’s holiday.
“Wild swings like these are what we saw back in 2008 when we were in fear-ridden, bear markets. Gains like these usually peter out after a few days or weeks,” said Adam Sarhan, chief executive of New York advisory Sarhan Capital.
“This a classic suckers’ rally. It will suck you in and spit you out.”
The 19-commodity Thomson Reuters-Jefferies CRB index .CRB rose nearly 3 percent to a 7-1/2 week high. It has gained 7.7 percent over the past three sessions, the third-largest three-day gain on record. For the year, it was still down 4 percent.
And U.S. crude oil, despite a near 14 percent gain in three sessions, remains technically in a bear market, closing 20 percent lower from the year’s high above $110 in March.
“I think this is (a) positioning for geopolitical risk in the Middle East,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis.
With oil relatively more affordable than a few months ago, buyers were seeking “cheap portfolio insurance in case an event occurs,” said O’Grady.
U.S. crude surged almost 5 percent to end above $87 per barrel Iran said it had successfully tested missiles capable of hitting Israel, in response in response to threats of military action against the Islamic Republic over its nuclear ambitions.
Earlier, on Friday, U.S. crude had jumped 9 percent to end June with its fourth biggest daily gain on record.
London’s Brent crude closed up 3 percent on Tuesday at above $100 per barrel the first time in three weeks. Brent held to those gains in post-settlement trade after industry data late on Tuesday showing a higher-than-anticipated draw of U.S. crude stockpiles last week.
The rally in commodities was also far greater than anywhere else in the financial markets.
Wall Street’s S&P 500 stock index (.SPX) closed less than a percent higher, although U.S. stocks rose for a third straight day .N. The euro inched up against the dollar.
Three-month copper on the London Metal Exchange jumped 2.5 percent to a seven-week high of $7,823 a tonne, and was priced at the end of the day at $7,819.
Copper traders focused mostly on prospects of further monetary easing by central banks.
“The ECB is probably going to reduce the interest rate, China might cut its interest rate too and there is also speculation that the Fed may come into play after disappointing ISM data yesterday,” said Daniel Briesemann, an analyst at Commerzbank who follows the copper market.
“This is definitely having an effect, although we don’t see the Fed intervening until the economy deteriorates further.”
U.S. manufacturing shrank in June for the first time in nearly three years, adding to signs of a recovery slowdown but raising hopes for more policy easing by the Fed.
Gold prices rose too, gaining 1.5 percent, on renewed expectations that the U.S. Federal Reserve may join other central banks in considering further monetary easing after global economic data remained weak in June.
In crop markets, worries about relentless heat in the U.S. grain belt drove corn and wheat prices to their highest levels since last August and soybeans to a four-year peak.
“There’s something for the bulls and bears today, with the crop continuing to sink with the hot, dry conditions,” said Don Roose, president and an analyst at U.S. Commodities in West Des Moines, Iowa. “The bears have something with a little bit of a possible change cooler in those way distant maps.”
The U.S. Department of Agriculture (USDA) on Monday slashed its condition rating for U.S. corn to 48 percent good-to-excellent, down 8 percentage points from a week earlier. It pegged the soybean crop at 45 percent good-to-excellent, compared with 53 percent a week ago.
The long-range forecast offered some mild relief as cooler weather is expected next week in the U.S. Midwest corn- and soybean-growing region.
Chicago Board of Trade’s corn futures for July settled up 26-1/4 cents, or nearly 4 percent, at $7.18-3/4 a bushel.
CBOT wheat also gained almost 4 percent to finish $7.82-1/4 a bushel. Soybeans added 2.6 percent to close at $15.72-1/4.
Elsewhere on the agricultural front, U.S. raw sugar hit a two-month high, boosted by delays to top producer Brazil’s harvest after wet weather. Arabica coffee was also supported by concerns over the impact of rain on the quality of the coming crop. (Editing by David Gregorio and Bob Burgdorfer)