Goldman Sachs says commodity rally unlikely to last

The most influential bank in commodity markets believes the recent rally is unlikely to last and prices will reverse unless there is a sustained improvement in demand led by China, the world’s biggest consumer of raw materials

In a series of reports published on Tuesday, Goldman Sachs said the 20-month commodity rout had further to run and prices needed to remain lower for longer to rebalance markets that are still groaning under the weight of plentiful supplies.

“Demand hasn’t really changed, [so] it takes lower prices to push and keep supply below demand to create a deficit,” said Jeffrey Currie, Goldman’s head of commodities research.

Goldman has been consistently negative on commodity prices during the past 18-months, with Currie forecasting that oil prices could fall to $20 a barrel. Brent, the international benchmark, hit $27 a barrel in January, down from the $100 it averaged between 2010 and 2014.

Currie said the recent bounce, which took oil prices back to $40 on Monday, would ultimately prove “self defeating” because it throws a lifeline to the cash-strapped producers that are in desperate battle for survival.

“It would reverse the supply curtailments that are expected to rebalance the markets in the second half of 2016,” he said.

US oil production has started to decline in the face of lower prices, though companies may keep output going if the price recovers further, probably damping the extent of any rally.

Goldman has also maintained its bearish view on gold, which has risen to 20 per cent this year, making bullion one of the best performing commodities so far in 2016.

As fears about US economic growth fade and the US dollar recovers, the bank expects gold to come under pressure. Its 12-month target price for the precious metal is $1,000 a troy ounce, compared with a current quote of $1,273.

The Walls Street bank reserved its most bearish comments, however, for industrial metals, advising investors in another report to take positions betting against aluminum and copper prices, which it forecasts as falling 18-20 per cent during the next year.

“Overall we find that the likelihood of a sustained improvement in Chinese demand during 2016-17 is low, and we remain strongly of the view that the structural bear market drives that have contributed to metals declining 20 per cent over the past year and 50 per cent over the past five years remain intact,” said Goldman analyst Max Layton.