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Commodities Drop to Lowest in 5 Weeks as Fed Debates

Commodities tumbled the most in 15 weeks on concern the Federal Reserve will change the way it adds stimulus to the economy, and as U.S. crude stockpiles rose to a seven-month high.

The Standard & Poor’s GSCI Index of 24 raw materials fell 1.6 percent to end at 657.31, the biggest one-day decline since Nov. 7. The index dropped for a fourth day, the worst run since December.

Several policy makers said the Fed should be ready to vary the pace of the $85 billion in monthly bond purchases amid a debate over the risks and benefits of further easing, minutes of the Federal Open Market Committee’s Jan. 29-30 meeting showed yesterday. The dollar strengthened to a six-week high against the euro and U.S. stocks dropped. Oil inventories increased 1.1 percent last week to 376.4 million barrels, the most since July 20, the Energy Information Administration reported today.

“The statement out of the Fed basically scared investors,” said Rich Ilczyszyn, chief market strategist and founder of commodity trading firm in Chicago. “The commodity market is more of a reflection of a stronger dollar and a weaker equity market.”

The FOMC minutes showed policy makers were divided about the strategy behind Chairman Ben S. Bernanke’s program of buying bonds until there is “substantial” improvement in a U.S. labor market burdened with 7.9 percent unemployment, with some saying an earlier end to purchases might be needed, and others warning against a premature withdrawal of stimulus.

Fed Assumptions

“The market had been rallying on the assumption that the Fed’s asset buying program was solid and open ended, and the minutes showed that there had been at least some discussion about how and when to scale back,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said in an e-mail.

The euro fell as much as 0.9 percent against the dollar to $1.3161, the weakest since Jan. 10. A stronger dollar reduces commodities’ appeal as an investment alternative. The Standard & Poor’s 500 Index dropped 0.6 percent to 1,502.42.

“You are seeing a very strong dollar because of the Federal Reserve comments,” said Phil Flynn, senior market analyst at the Price Futures Group in Chicago. “We broke the back of the bull market. We had a run-up that’s inspired partly by the weak dollar.”

Wheat Slumps

Wheat and energy markets were among the biggest decliners on the commodity index while cocoa prices gained. Wheat futures fell the most in seven weeks as snowfall expected in Kansas, the biggest U.S. grower of winter varieties, eased concern that drought in the Great Plains will damage crops.

Wheat for delivery in May fell 21.25 cents, or 2.9 percent, to end at $7.24 a bushel on the Chicago Board of Trade, the biggest decline since Jan. 2.

West Texas Intermediate oil for April delivery on the New York Mercantile Exchange plunged $2.38, or 2.5 percent, to $92.84 a barrel. Gasoline and heating oil also declined.

U.S. oil stockpiles increased 4.14 million barrels in the week ended Feb. 15, according to the EIA, the Energy Department’s statistical arm. Analysts surveyed by Bloomberg had expected a gain of 2 million barrels. Demand for petroleum products fell 3.3 percent to 18.4 million barrels a day.

“The much-needed correction has taken some steam off the overbought market,” said Andrey Kryuchenkov, a commodities analyst at VTB Capital in London, who forecast last week that oil prices would drop. “Short-term fundamentals simply do not justify sustained gains.”

Cocoa futures for delivery in May advanced 0.9 percent to $2,133 a metric ton on ICE Futures U.S. in New York, the first increase since Feb. 7.

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