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The Fundamental Outlook For Commodity Prices Is Strong, Says Goldman Sachs

Daniel Plainview

Updated: July 11, 2022

commodity bull run
Editor’s Note:

EDITOR'S NOTE: The bullish commodity outlook in metals and energies is poised to see further upside, according to a recent Goldman Sachs report. The megabank attributes the looming spike in commodity prices to sinking inventories, saying that the current plunge in prices has “de-linked” from supply-demand fundamentals, declining into “oversold” levels. So, what does that mean, according to Goldman? It means the bank seeks the pullback in energy and metal prices as a unique buying opportunity. But investors are wondering how much higher these prices can go, considering the record highs from which prices have been pulling back. Apparently, the bank sees the year-end levels for gold, silver, and energies to be far above what most investors expect. How high? Read on.

(Reuters) - The fundamental outlook for commodity prices is strong with inventories of metals and energy continuing to fall from low levels, Goldman Sachs said, terming a recent price pullback as longer-term buying opportunities.

Commodities markets have been oversold, de-linking with supply-demand fundamentals, the bank said in a note dated July 7.

“Mobility remains robust globally and continues to recover strongly in China and the oil market is pointing to a 1 million barrel per day (bpd) deficit. U.S. and European aluminium premia remain historically high, while physical order books for metals remain strong,” the bank said.

Commodities will weather risks of a recession in the United States and Europe in the next 12 months, “on China’s large-scale counter-cyclical stimulus,” the bank said.

It forecast returns of 34.4%, 30.4% and 36.9% on commodities over a three-, six- and 12-month period respectively on the S&P/GSCI Goldman Sachs Commodity Index (GSCI), adding commodities were a “great macro hedge.”

“An allocation to a true real asset like commodities remains a necessity to protect a multi-asset portfolio.”

Industrial metals were seen returning 57.2% over a 12-month period, followed by precious metals at 48%, energy at 40.7%, and agriculture at 24.4%, the bank said.

As for energy, Goldman reiterated its view that the oil market was in a structural deficit.

“This deficit will likely persist at current oil prices given the expected moderate recovery in Chinese demand and declines in Russian exports (amid EU sanctions),” the bank said, forecasting the decline in Russian exports to accelerate from 0.3 million bpd to 1.5 million bpd by the first quarter of 2023.

Oil prices rose on Friday but were heading for a weekly decline as recession concerns outweighed tight supplies. The slowdown fears have taken a toll on most commodities, with copper hitting a 20 month-low this week. [MET/L] [O/R]

Reporting by Arpan Varghese in Bengaluru; editing by Jonathan Oatis

Our Standards: The Thomson Reuters Trust Principles.

Originally published on Reuters.

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