Heavy profit-taking in grains and metals wiped out early gains in commodities Tuesday, but inflation worries and tensions in Middle East oil producing nations could reverse the trend quickly, analysts said.
"If you're an investor and looking to position yourself in this environment, you'll go long commodities," said Adam Sarhan at Sarhan Capital in New York. "We are starting to see higher inflation that's going to reflect itself in higher oil prices and higher commodity prices everywhere."
Investors are expected to look out for U.S. inflation and housing data Wednesday to determine how price pressures are contrasting with recovery in the world's largest economy.
In China, inflation hit a lower-than-forecast 4.9 per cent in January, but price pressures excluding food were at their strongest in at least a decade.
Unrest in the Middle East and potential for supply disruptions in oil are also being closely watched.
Police and protesters clashed in Bahrain in follow-through to the protests in the region that have brought down the Tunisian and Egyptian governments.
In Iran, lawmakers urged death penalties for opposition leaders after a rally by thousands of opposition activists. In Yemen, hundreds of demonstrators and government loyalists fought in the capital.
"We are seeing contagion from Tunisia and Egypt to other countries that are more important for the oil markets," said Christophe Barret, oil analyst at Credit Agricole Corporate and Investment Bank.
U.S. crude oil finished down half a per cent at $84.32 (U.S.) per barrel, after rising to almost $86 earlier. London's Brent crude settled down 1.4 per cent at $101.64 per barrel, after touching a session high above $104.
The Reuters-Jefferies CRB index, a global benchmark for commodities, settled down 0.7 per cent for its largest one-day loss in nearly two weeks. The 19-commodity index had begun the day strongly after tracking the initial rise in oil prices.
Wheat closed down almost 4 per cent at $8.40-1/4 a bushel in Chicago, retreating sharply from last week's 2-1/2 year high above $8.93.
Chicago soybean futures fell 2.5 per cent on cancelled export orders. Corn finished 1 per cent down.
The sell-off in grains came after major wheat grower Australia issued a surprisingly high forecast for wheat exports this year despite excessive rains that were expected to quality.
Analysts said the U.S. Department of Agriculture's acreage forecasts from Monday, while preliminary, also led to a wave of fund selling and profit-taking.
Despite Tuesday's rout, many analysts and traders remain bullish on grains near term.
"I don't see the fundamentals have changed. We're just seeing a washout from the overbought conditions that we've had," said Shawn McCambridge, analyst at Prudential Bache Commodities in Chicago.
"We've had a good run to the upside based on good, strong demand coming into the market, but things have quieted down."
Copper futures in London closed down $149 at $10,011 after hitting record highs at $10,190 a tonne. In New York, U.S. copper ended 2 per cent down at $4.5360 a lb after setting an all-time peak at $4.6495.
Gold prices rose to a four-week high as inflation worries sparked a technical breakout, and as Chinese data curbed expectations for further interest rate hikes there.
Spot gold rose 1 per cent to above $1,374 an ounce. U.S. gold futures settled up $9 at above $1,374 an ounce.
Gold is on track for a third week of gains, recovering from the losses it made in January when rising appetite for risk fueled buying of higher-yielding assets.