not everyone is bearish in the medium termCANBERRA (Dow...

not everyone is bearish in the medium term

CANBERRA (Dow Jones)--The sharp downward correction in base metals and energy prices may have some steam left but the fall isn't the start of a long-run bear market and with the market too pessimistic on demand, prices could bounce in 2009, according to an analysis issued Wednesday by Westpac Banking Corp. (WBC.AU).

Prices have tumbled from mid-July for commodities actively traded on futures exchanges, where an unwinding of speculative net bought positions and the establishment of net sold positions accelerated, deepening the correction, Justin Smirk, Westpac's senior economist for commodities, said in a commodities bulletin.

This sentiment reversal was partly supported by a view on the deepening of a slowdown for developed economies and a strengthening of the view China was slowing and it would mark the turning point in the commodity cycle, he said.

"Our view is that the market is now too pessimistic on demand, in particular the outlook for resource-intensive activity in the developing world," he said.

Moreover, the demand/supply fundamentals for the bulk commodities of iron ore and coal that aren't traded on exchanges continue to surprise with their strength, he said.

"We are still believers in the strong structural fundamentals of the developing world and its capacity to support growth through domestic demand," he said.

The current correction for base metals and energy should continue for the near term "well and truly blowing the speculative froth off the market. That is an important precondition for a bounce in prices in 2009," he said.

The tight supply outlook is a positive for both copper and aluminum, he added.

The outlook for oil is similar to that for base metals, with demand softening in developed economies but still growing in developing economies, thus leaving oil prices "open to recovery as demand comes in stronger than expected," he said.

Westpac forecast Nymex prompt light, sweet crude will rise to US$120 a barrel in December from US$113.27 a barrel now, while spot gold will rise back to US$900 a troy ounce by the year-end from the last bid of $808.60/oz.

LME 3-month copper will return to US$7,700 a metric ton by December from last bid of US$7,150/ton, while aluminum will rise to US$3,000/ton from US$2,780/ton now.

Nickel will hold around the current level of US$18,050/ton, while zinc will advance to US$1,800/ton by December from US$1,628/ton now and lead will also hit US$1,800/ton at the year-end from US$1,733/ton now, Westpac forecast.