Inflows to commodities-related stocks remain robust, as the whole spectrum of the investment community–from individual investors to money managers and hedge funds–remain extremely bullish on the prospects for commodities. Furthermore, dedicated private funds are being to invest in the sector.

Metal-related exchange-traded funds have also enjoyed an uptick in investment, especially those that are backed by physical metals rather than securities or derivatives. Copper, in particular, has attracted a great deal of speculative activity; long-positions currently rest at record levels in terms of volume and value. Check out the graph below.

Source: Bloomberg

At the same time, however, Chinese imports of copper have slowed, falling 34 percent in October. US copper shipments were up 10 percent compared to September, but even with that slight sequential improvement these levels still off 30 percent from a year ago. Japanese shipments, though on the mend, are down 20 percent on a yearly basis.

On the supply side, disruptions stemming from new strikes at the mines are a distrinct possibility, as wage negotiations continue at BHP Biliton’s (NYSE: BHP) Spence copper mine, Corporación Nacional del Cobre de Chile’s (Codelco) Chuquicamata copper mine and Xstrata’s (London: XTA) Peruvian Antamina mine. Meanwhile, workers at Vale’s (NYSE: VALE) Canadian Voisey Bay mine remain on strike. All these mines are big producers of copper; any further slowdown in production will be a short-term positive for copper prices.

Copper remains the ultimate barometer of conditions in the metals sector; it’s important that commodities investors track developments in the copper industry. Given the market’s enthusiasm for copper and the reality on the ground, I expect investment inflows to support short-term prices until the supply/demand situation settles out early next year.

BHP Billiton and Oil

Shares of our preferred diversified mining company, BHP Biliton (NYSE: BHP), have performed respectably (up around 95 percent) since our recommendation in early January.

The company is the world’s largest diversified natural-resources company. Its main businesses include coal (coking and steam), base metals (aluminum, copper, nickel and zinc), iron ore, diamonds, as well as oil and gas.

Australia is home to 33 percent of BHP’s assets; 32 percent of its assets are in South America and 21 percent are in southern Africa. The petroleum division’s main producing assets are the Bass Strait and the North West Shelf in Australia, though the company is focusing on the Gulf of Mexico to grow future production.

Our long-term positive view on oil, based on the studied assessment of our energy specialist Elliott Gue, played a role in our selection of BHP. Suffice it to say that elevated oil prices are becoming the norm once again, as the price of oil should stay above USD70 to USD80 a barrel now that the credit crisis has abated.

On the demand side, economic growth in China and India has buttressed oil consumption, offsetting anemic demand in the US, the product of continued economic weakness.

The supply side on oil is a complicated issue, but we think that Elliott Gue’s analysis, which points to higher oil prices over the long term, is correct:

Non-OPEC oil production will, at best, remain steady in coming years; additional production from nonconventional sources, such as oil sands and deepwater, will offset declines from mature onshore and shallow-water fields.

In other words, production from easy and cheap-to-produce large onshore fields with less- complicated geology will be replaced with more expensive-to-produce offshore fields. That translates into rising marginal costs for crude oil production and elevated oil prices to incentivize undertake the massive investment needed to produce oil sands and deepwater projects.

In coming years, the amount of oil OPEC must produce to balance demand (the so-called “call”) will increase gradually as demand from developing countries rises and non-OPEC supply declines. OPEC countries have a number of planned projects slated for completion in the next seven years that should increase the organization’s production capacity. The bulk of this new capacity will come from Saudi Arabia. Of course, there remains a big question mark as to whether these planned expansions ultimately will increase capacity to the extent expected.