London: Crude oil rose from six-month lows on Wednesday, leading a broad rally in the commodities complex after the Federal Reserve’s pledge to keep US interest rates near zero for at least two years, which in turn, kept gold near record highs.
While the central bank’s decision to keep borrowing rates low sparked some risk appetite among investors, its motivation remained the weakness in the US economy and an unemployment rate stuck above 9% for most of the last 2-1/2 years.
Markets took this as a cue to sell the dollar, which fell 1% against a basket of major currencies, but commodity analysts said this boost could prove short-lived for raw materials.
“The impact of the Fed move will likely fade by week’s end,” MF Global analysts wrote in a note. “The Fed’s move to keep rates depressed for so long is likely because the central bank realises that growth will be tepid for some time to come. This scenario does not bode well for commodities, especially base metals and energy.”
Brent crude rose by more than 3%, set for its largest one-day rally in a month, with an intraday high of $106.58 a barrel.
It was at $106.03 at 3:30pm, having hit its lowest level since February on Tuesday.
The energy market largely shrugged off a decline in Chinese imports to one-year lows in July, despite refiners cranking up production.
The Organization of the Petroleum Exporting Countries and the US Energy Information Administration cut global demand growth forecasts for 2011 as the economic outlook for developed countries worsened.
Against the darkening economic backdrop, the gold price held near record highs struck on Tuesday in dollars , euros , yen and sterling .
The Fed said it stood ready to take additional measures to stimulate growth, but stopped short of flagging a fresh round of bond buying to keep interest rates low, known as quantitative easing, which was a key driver in the sharp rise in commodity prices, including gold over the last year.
“Generally speaking, the panic is subsiding for the moment. I would expect that (gold) will consolidate at these levels for a while before we get any sort of clear idea of the sort of next major moves,” said Citigroup analyst David Thurtell.
“I think there are enough concerns about sovereign debts and weakening growth, that people will buy dips, so it should remain supported.”
Gold priced in dollars was last up 0.6% on the day at $1,753.19 an ounce, having hit a record $1,778.29 on Tuesday, bringing its gains for the year to nearly 25 percent.
Low real interest rates, which strip out the effect of inflation, create a positive environment for gold, which tends to fall out of favour with investors when rates rise as it bears no yield or dividend of its own.
The higher chances of quantitative easing and the guarantee of a period of low rates from the Fed has prompted a number of banks to raise their gold price forecasts. Bank of America-Merrill Lynch lifted its forecast to $2,000 on Wednesday, while earlier this week, Goldman Sachs raised its forecast to $1,860 for 2012, from a prior estimate of $1,600.
Other industrial commodities also benefitted from the Fed’s comments.
Three-month copper on the London Metal Exchange rose 1.3% to $8,848 a tonne, after falling to its lowest level since December in the previous session.
Evidence of booming demand from top-consumer China offered a further layer of support.
China’s imports of copper rose 9.5% from June to 306,626 tonnes in July, data from the General Administration of Customs on Wednesday showed.
“The announcement that the Fed’s interest rate policy will remain for some time certainly supported the market and in some ways acts as a form of a brake on the decline that was seen in the last 48 hours,” said Jonathan Barratt, managing director of Commodity Broking Services.
“Also, import data from China, such as on copper, has been very positive. That shows that China’s efforts to slow the economy aren’t working as well as expected. And the economy seems to be kicking along in full gear.”
In agricultural markets, Chicago wheat rose 2%, while soybeans bounced back on the Fed’s comments.
Chicago Board of Trade actively traded November soy rose 1% to $13.13-1/2 a bushel, after touching a low of $12.82 a bushel on Tuesday, the lowest since 17 March.