Goldman ‘convinced’ commodities to rally strongly after drop

Commodity bull Goldman Sachs Group Inc said that raw materials will rebound from their recent sell-off, with a deficit seen in the global oil market this quarter and resilient demand in China for metals.

“We remain convinced that commodities will once again rally strongly off this trough,” analysts including Michael Hinds and Jeffrey Currie said in a note received on Thursday. The bank forecasts returns from the S&P GSCI Enhanced Commodity Index of 6.5% over the coming 12 months.

Raw materials were mauled in October, with steep losses in oil and metals, which tumbled along with global equities. The drivers of the declines were a resurgence of concern in energy markets about excess supply, speculation that global economic growth was slowing amid the USChina trade war, and a jump in risk aversion. The sell-off was rapid, and the losses may have been exacerbated by systematic volatility strategies, according to Goldman.

“We believe Brent is now oversold, and continue to see a deficit in the fourth quarter,” the analysts wrote. “The US is likely to seek to maintain ‘maximum pressure’ on Iran despite the recent waivers,” it said, referring to sanctions exemptions granted by Washington to a handful of nations taking Iranian oil. Brent is forecast to climb to $80 a barrel by year-end, although it’ll drop back to $65 in 2019, the bank said. On Thursday, the energy benchmark traded near $72. Among other targets, copper is seen climbing to $6,500 a tonne in three months, while nickel will rally to $15,000 a tonne over the same time frame.

Goldman is also bullish on aluminium, citing supply risks including looming output cuts in China over the winter, sanctions facing Russian producer United Co Rusal, and disruption at Norsk Hydro ASA’s alumina refinery in Brazil. “The market is clearly in deficit and inventory continues to draw,” it said. “In metals, we also see too much pessimism already priced in,” the analysts said. “We view Chinese demand as remaining relatively healthy; and we see prices starting to cut into cost curves. In agriculture, trade policy remains the number-one uncertainty.” Goldman has been consistently upbeat on raw materials in recent months, arguing that they stand to do well in the late stage of the economic cycle.

“We find that we are now even closer to moving out of the mid-cycle and into a ‘late cycle – inflation overshoot’ period,” it said.