Goldman Skeptical of Commodity Rally; Metals to Fall Further

  • Rebound driven by short-term factors; supply problems persist
  • Energy upgraded on prices bottoming; metals may see more lows

Commodities aren’t out of the woods yet, according to Goldman Sachs Group Inc.

A rebound in markets from metals to energy have been prompted by short-term factors such as supply disruptions, while the longer-term supply problems of excess capacity persist, Goldman analysts including Jeffrey Currie said in a research note dated April 22.

“The rally has been far stronger in the oil and steel complexes, commodity sectors that have seen near-term, transient, supply adjustments,” the Goldman analysts wrote in the note. “Given the near-term and temporary nature of the current rebalancing and the lack of longer-term sustainable deficits in any of the markets, it is premature to embrace these ‘green shoots.’”

The Bloomberg Commodity Index has recovered 15 percent since slumping to the lowest level in more than two decades on Jan. 20, boosted by rallies in crude and steel. Oil’s 64 percent resurgence in the same period has come amid a spate of large supply disruptions caused by pipeline outages and worker strikes, Goldman said. A sustainable shift in fundamentals isn’t expected until the third quarter, raising the risk of lower prices in the near term, according to the bank.

Goldman upgraded its rating on energy to neutral from underweight, saying prices may have bottomed in the first quarter. Base metals haven’t seen their lows yet, the bank said, keeping its near-term underweight rating on the sector.

Steel reinforcement bar’s 53 percent surge since mid-January has been driven by traders holding the smallest inventory in years as the Chinese government’s stimulus spending spurred construction demand. That’s driven an iron-ore rally, which is unsustainable in the absence of a material increase in steel consumption to absorb excess supply from mine expansions in Australia and Brazil, Goldman said.

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