Commodities: What’s next in store for the market – Goldman Sachs

Analysts at Goldman Sachs note that a year has now passed since commodity markets reached historical lows, which erased all of the investment gains of the 2000s, and started a rebound that has resulted in a doubling of many commodity prices to current levels which leaves open the question of what next?

Key Quotes

“Market positioning is now extremely long across the commodity complex, as markets have priced in robust expectations on forward demand and inventory draws that have yet to materialize. At this point, we would argue that commodity markets are likely to remain in a holding pattern as they wait for hard data to confirm the most recent leg up. Markets need to see that the OPEC supply cuts generate real inventory draws and the strong manufacturing survey and Chinese credit data create real activity. In other words, ‘show me the activity’; real demand, real stock draws and empty warehouses.”

“As recent survey data suggests that global GDP growth is tracking at 4.4%, well above our economists estimate of 3.6%, confirmation of such robust activity and inventory draws has the potential to push prices above our expectations. However, we believe these upside price risks are greater in metal markets than oil due to the offsetting supply response from US shale producers that is beginning to gain momentum.”

“Without a follow through into real activity and inventory draws, commodity markets and broader financial markets more generally would be poised for a significant correction given the strong correlation between speculative positioning and the survey data such as the PMIs. However, we are confident that real activity and inventory draws are likely to materialize going into 2Q17 for several reasons: 1) in oil, the US will be the last to draw and global fundamentals suggest a much stronger market than the recent US stock builds would suggest; 2) the linkage between the survey data and real activity is historically very strong; and 3) in China, the virtuous cycle created from rising PPI likely has further to run before tighter Chinese policy potentially intervenes, and the composition of the credit data is more commodity intensive as it is less reliant on mortgages.”

“In oil, while the reduction in supplies out of core OPEC in the Gulf and Russia has exceeded our and consensus expectations, the market is starting to doubt that this will be sufficient to translate into large oil inventory draws by 2Q17. This is mostly due to recent surges in US oil inventories, weak data points in Indian and US motor gasoline demand, and worries over increased US shale output given the optimistic guidance from US E&P companies during this earnings release period.”