Warning of a "rush for the exits", analysts at Barclays said investors could start liquidating their positions in commodities, resulting in price levels for oil and copper to drop as much as 25%.
A note issued by the British bank warned that investors could start backing away from commodities, an asset class that has given good returns in 2016. The year is understood to have seen the strongest start since 2011. In the first two months alone, investments in commodities is said to have totaled more than $20bn (£14.04bn, €17.86bn).
The bank explained that though commodities was one of the favorite investment picks because of their returns this year, it was unlikely that this asset class would give the same kind of returns in the second quarter of 2016. Barclays added that the recent price hike in commodities was not justified as fundamentals had not improved. It said there was also an increase in production capacity and inventories of certain commodities such as oil and copper.
"This could make commodities vulnerable to a wave of investor liquidation that we estimate could, in a worst case scenario, knock as much as 20-25% from current price levels," the note said, adding that while oil prices could touch the low $30 levels, copper prices could hit the low $4,000 region.
The futures positions in copper and oil, which was earlier bearish, have become bullish in a few weeks. Adding to this is the evidence of a surge in investments entering the Chinese commodity markets. However, Barclays opined that a short-term turning point for investors was around the corner and this could lead to quick commodity selling that would in turn lower their prices, according to The Telegraph.
"We very much doubt that recent large inflows to commodity investments are the start of new wave of enthusiasm for long-term, broad-based exposure. Given the weakness of underlying fundamentals, we suspect that the latest move into commodities by investors may be closer to its end than its beginning," the bank added.