Goldman Calls for Patience to See Commodity Gains After Rout

  • Bank says investors should go, stay long on oil and copper
  • Goldman sees demand outstripping supply and boosting prices

Goldman's Currie Sees Oil Demand Set to Outpace Supply

Goldman Sachs Group Inc. isn’t letting the biggest commodities rout in eight months shake its confidence in raw materials.

The bank is sticking to its view that tightening supplies will lead to higher prices later this year, maintaining its positive outlook on the sector, according to a report dated March 12. Investors should go or stay long on West Texas Intermediate oil and copper, analysts including Jeffrey Currie wrote. Barclays Plc said in its own note Monday that the bank remains “bullish” on crude through to 2020.

The Bloomberg Commodity Index, a measure of raw material returns, fell 3.4 percent last week in the biggest decline since July, led by drops in oil and nickel. That sell-off was driven by concerns over a slowdown in China that are misplaced, as demand in the country continues to rise, according to Goldman. Despite the slide, near-term contracts for oil and copper continued to do strengthen relative to futures further out, a signal that underlying market fundamentals are strengthening, the analysts said.

“All of these concerns are misplaced and argue that the market needs a little patience to wait for the fundamentals to materialize,” Currie wrote in the report.

Goldman maintained its second-quarter price outlook for U.S. benchmark West Texas Intermediate crude at $57.50 a barrel, and for copper on the London Metal Exchange at $6,200 a metric ton.

WTI crude traded down 0.5 percent at $48.27 a barrel on the New York Mercantile Exchange by 4:26 p.m. Singapore time. LME copper was up 1.2 percent at $5,801 a ton.

“What gives us confidence in tighter forward commodity markets despite this past week’s sell was that it was mostly time-spread neutral across the commodity complex,” Currie wrote in the report. “In fact, front end WTI time-spreads strengthened into Thursday and Friday’s flat price weakness. If the sell-off was driven by fundamental weakness, timespreads would have weakened.”

Reflation Divergence

The services sector in the U.S. and Europe continued its rebound last week, Goldman said, indicating that the commodity sell-off was driven not by concerns that global reflation has gone off course, but by slowing Chinese economic growth and doubts that production cuts by the Organization of Petroleum Exporting Countries are ending a global supply glut. Both those concerns are unfounded, Currie said.

Chinese credit and liquidity data for February was lower than analyst expectations. Despite the slowdown in growth, the levels still rose from the previous year, suggesting strong commodity demand levels from the world’s largest user of energy, metals and grains this summer, according to Goldman.

A recent gain in U.S. oil inventories to record levels just reflects the emptying of supplies stored in ships, lower U.S. exports into Latin America and the arrival of a surge in imports from OPEC members that loaded the cargoes before the group began cuts in January to ease a global glut, the bank said. Goldman expects all of those factors to reverse in the next few weeks.

For more, see: Goldman Stands by Oil Forecast in Face of U.S. Import Flood

Major oilfield developments planned for completion by 2020 remain scant, are being delayed, and in most cases are meant to manage existing declines rather than substantially grow production, Barclays said in a report dated March 13. The bank remains constructive on oil prices in the second quarter and in the medium term, analyst Michael Cohen wrote in the note.

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