By Richard Valdmanis and Annika Breidthardt

NEW YORK/SINGAPORE - One might have assumed commodity prices bumping along near multi-year lows would repel investors from the once hot markets. But the opposite may be true thanks to high volatility - a key ingredient in profit making.

Crude oil and copper prices have tumbled to a fraction of their peaks hit last summer, as the global economic crisis has taken its toll. To be sure, the rout has brought with it a decline in open interest in the markets.

But with the steepest part of the sell-off in the past, prices for many commodities have been rangebound above their lows with uncertainty over the economy feeding sharp gyrations - up one day and down the next.

'Any sort of confusion over where a trending market will finally come to rest will result in an increase in implied volatility,' said Jonathan Kornafel, Asia Director of options trader Hudson Capital Energy.

With price moves of 5 per cent and 10 per cent commonplace in the oil and copper markets in a single trading day, the volatility has proven attractive to active speculative investors. Volatility has led others to try more aggressively to lock in prices as a hedge.

'The more volatile the price is, the more there is a need and a demand to do something about it,' said Tim Evans, energy analyst at Citi Futures Perspective in New York.

The attraction to volatility has helped open interest levels in commodities markets pull out of a nosedive. Open interest in the U.S. crude oil market is down about 19 per cent since peaking last May, but has recovered about 15 per cent since last October, according to CFTC data.

Trading volumes in the front-month contracts have risen nearly 9 per cent since last December, but still trail volumes for equivalent contracts a year ago.

'We are happy with the relative amount of activity,' said Bob Levin, a managing director of energy for CME Group/NYMEX.

The outlook for volatility in crude oil and copper is mixed, however. Some analysts say volatility should subside once markets grow more certain of the global economic outlook.

'With the price movements as electric and jaw-dropping as they were in the correction since mid-2008, volatility spiked to record levels during the final months of 2008, but they will continue to come down now,' said Peter McGuire, Managing Director of Commodity Warrants Australia.

Oil prices are currently rangebound, analysts say, because traders are trying to balance the effects of the weak economy on energy demand against OPEC's aggressive output cuts.

Passive investors at risk

While some traders have been gravitating toward the volatility in commodities markets, other market conditions keep chipping away at passive long investment, experts said.

Those conditions are the contango - which occurs when prices for front-month delivery are cheaper than prices for later-month delivery - and the lack of a clear uptrend in prices across the futures curve.

'A lot of these passive investors that like to invest in ETFs, things like that, are beginning to realize the huge yield detriment of rolling forward into these higher priced contracts each successive month,' said Jim Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois.

'In an extended sideways trade in oil, you're going to begin losing long-term investors,' he said. Analysts said much of the loss in open interest in crude oil and other commodity futures since last year was the result of pass ve long investors cashing out of hedge funds and averting risk during the overall markets slump.

But analysts said conditions for passive long investment in crude oil could improve if OPEC continues to restrict output aggressively and the economy begins to recover.

'If OPEC production is at a low enough level that we see inventories trending lower, that's going to put upward pressure on the front end of the curve and that vast contango over time will become a thing of the past,' said Tim Evans, energy analyst at Citi Futures Perspective in New York.