Goldman reiterates bearish call on commods (again) | FT Alphaville

Goldman reiterates bearish call on commods (again)


This is the third bearish commodity note from Goldman Sachs in one week.

They must really be keen on the view, eh?

And, dare we say it, the latest note sounds rather panicky — entitled as it is “Growing conviction in NT downside, but longer-term upside intact.”

(Let’s face it in 2008 they were one of the last research houses to U-turn on a previously bullish view — and it didn’t do much for their forecasting reputation.)

Here’s the main trunk of it anyhow.

First on oil (our emphasis):

We recommend shifting allocation to underweight for now... Commodity returns have substantially outperformed, owing largely to the loss of Libyan oil production and concerns that unrest in the Middle East and North Africa (MENA) could lead to losses in another oil producing country. However, while contagion risk remains elevated, we maintain that crude oil prices have pushed ahead of where fundamentals currently suggest and that the near-term downside risk to prices has risen in recent weeks as oil prices have climbed to exceptionally high levels last seen in the spring of 2008.

Not only are there now nascent signs of demand destruction in the United States, but also elections in Nigeria, a potential ceasefire in Libya and record market length on contagion fears.

(Although they naturally still see upside for commodity returns on a 12-month horizon.)

Meanwhile, on metals they say:

Further, softening near-term base metals balances suggest that a stock-out in copper inventories and associated price spikes has now been deferred beyond 2011, and recent gold price strength has pushed us close to our near-term price targets. As a result, we now recommend an underweight allocation to commodities on a 3 to 6-month horizon.


Reinforcing this shift is limited upside for base metals from current historically high levels, in our view, largely owing to Chinese consumer destocking, tighter inventory management and the negative shock to supply chains resulting from the earthquake in Japan, which have softened near-term balances and have pushed out the timing of stock-out in the tighter metals such as copper. We have also approached our near-term targets on gold. Accordingly, the only sector where we see near-term upside is agriculture, with current inventories at exceptionally low levels across many of the key grains.

And on copper specifically:

In addition, we believe that stock-out for copper has been deferred, not avoided and is now likely to occur during 2Q2012. We also expect low real rates will continue to lead gold prices higher into 2012, before monetary conditions begin to shift gold risk to the downside. Finally, we maintain that soybean price risk is skewed to the upside over the next year on an expected deficit in the upcoming crop year and that price risk for other key grains is substantially skewed to the upside given current low inventories. We therefore maintain an overweight recommendation to commodities on a 12-mo horizon, but are lowering our 12- mo return forecast to 10.0% from 14.3%. Further, we note that while we have lowered our near-term allocation recommendation based on expected returns, the role of commodities as a portfolio diversifier and inflation hedge increases its attractiveness in the current environment, in our view.

To emphasise: that’s Goldman seeing a ‘stock-out’ in copper being delayed to the second quarter of 2012 — and no more mentions of supposed crackdowns on the use of copper as a financing tool only this week, as per their previous note.

They write instead just:

We continue to acknowledge distinctly tighter fundamentals for copper. However, the combination of Chinese consumer destocking, tighter inventory management and the negative shock to supply chains resulting from the earthquake in Japan, has moderated the expected market deficit this year, pushing out the timing of a drawdown in copper inventories to critically low levels beyond 2011, in our view (see Exhibit 7 and Metals Weekly: Copper price spike likely deferred, not avoided, April 12, 2011). As a result, the cyclical “breakout” that we had been expecting for copper in particular later this year is likely no longer required to balance the market.

On trading recommendations, meanwhile, they put out these rather telling statements.

We have no petroleum trading recommendations open at this time.
We have no natural gas trading recommendations open at this time.
We have no base metals trading recommendations open at this time.

The mark of people who really have no idea which way things might swing, we would say.

London copper prices have now trimmed gains, according to Reuters, while WTI is down 0.17 per cent in the session at $107.93, with Brent also reversing earlier gains to trade at $121.83 per barrel:

(Yes — that slide does coincide with the time the Goldman report was first widely-published).

Related links:
Goldman says there’s been a copper collateral crackdown – FT Alphaville
China’s copper as collateral addiction – FT Alphaville
Goldman jolts commodities market – FT Alphaville
Anatomy of a Goldman trading huddle – FT Alphaville