Commodities correction | FT Alphaville

Commodities correction

We like this chart from Goldman Sachs.

It shows their forecast that oil will rise to $85 a barrel by mid-January — and not a moment before!

GS WTI crude oil price forecast

In all seriousness, there’s been a step change in the commodities markets over the past week, with the US benchmark Nymex August West Texas Intermediate falling to $64.05 a barrel — the lowest in five weeks — after investors apparently (suddenly) came around to the fundamental economic realities of the market.

As Goldman’s Jeffrey Currie puts it in a piece of research out this Tuesday:

Last week’s higher-than expected US unemployment claims and weaker than- expected US payroll number were the catalyst for a selloff across the commodity markets. However, we view the selloff as simply a correction in a commodity rally that we believe had run ahead of itself, raising the risk of a liquidation of speculative positions that has materialized as expected. While the US employment numbers were the catalyst for the correction, the economic data has in general been mixed, as solid industrial news contrasts with disappointment on the employment front.

Importantly, while most commodity prices have moved lower, metals prices have held up relatively well, consistent with their higher leverage to the emerging economies, where economic data remains consistently better. Across commodities, however, the recent price declines have largely been driven by the declines in long-dated prices, with timespreads only moderately weaker, particularly in oil.

In general, the recent price moves are consistent with our views. In oil, we continue to expect the market to move into deficit in late 3Q09, which will begin to relieve some of the downward pressure on timespreads that we anticipate will continue until the fundamentals improve. We also believe that industry economics support long-dated prices around $75/bbl for the balance of the year and thus have cautioned that the build-up of investor length that pushed long-dated prices above $80/bbl in the past month was likely overdone, leaving the market vulnerable to liquidation risk. For metals, we continue to expect that near-term fundamentals will likely soften as Chinese buying programs diminish, but that price action will likely remain dominated by long-dated metals prices, which are closely linked to economic sentiment and the performance of other risky assets.

While Dresdner’s Eugen Weinberg is less sanguine:

There seemed to be a rude awakening on the commodity market last week after the rather unfounded optimism of financial investors led them to ignore reality. Triggered by weak US labour market data last Thursday, both oil prices and investor sentiment now seem to be turning, with more attention being paid to the risks again. The news of one oil trader of PVM Oil Associates upping oil prices to an 8-month high demonstrated the impact of financial markets on commodities pricing. In addition, it clearly underlines in our view that short-term events on the oil market have little to do with supply and demand. Oil prices dropped below $65 a barrel this morning, the lowest level since the end of May. With the return of the NYMEX – US exchanges were closed on Friday due to The Independence Day holiday – new selling pressure could arise today. As excessive economic optimism fades, markets are reassessing the situation. The fact that oil prices have doubled since mid February was largely due to greater economic optimism and not any improvement in the general fundamental data. Although US crude stocks have fallen sharply in past weeks, this was primarily because US refineries increased crude oil refining levels in the run up to and during the summer driving season. Owing to higher oil product stocks, weaker demand for petrol and distillates and falling refining margins, US refineries could demand less crude oil in the near term. We expect the price correction to continue in the direction of $60 a barrel in the next few days. Even reports on further attacks on oil infrastructure in Nigeria have had little effect, an indication that the mood is changing on the oil market.

Related links:
“Demand is in the toilet” – FT Alphaville
Reality check puts pressure on oil prices – FT