• 6 minutes Trump vs. MbS
  • 11 minutes Can the World Survive without Saudi Oil?
  • 15 minutes WTI @ $75.75, headed for $64 - 67
  • 12 hours US top CEO's are spending their own money on the midterm elections
  • 10 hours EU to Splash Billions on Battery Factories
  • 9 mins Satellite Moons to Replace Streetlamps?!
  • 14 hours OPEC Is Struggling To Deliver On Increased Output Pledge
  • 12 hours The Balkans Are Coming Apart at the Seams Again
  • 1 min U.S. Shale Oil Debt: Deep the Denial
  • 9 hours The Dirt on Clean Electric Cars
  • 10 hours Uber IPO Proposals Value Company at $120 Billion
  • 12 hours A $2 Trillion Saudi Aramco IPO Keeps Getting Less Realistic
  • 12 mins 47 Oil & Gas Projects Expected to Start in SE Asia between 2018 & 2025
  • 20 hours Petrol versus EV
  • 15 hours U.N. About Climate Change: World Must Take 'Unprecedented' Steps To Avert Worst Effects
  • 17 hours 10 Incredible Facts about U.S. LNG
Alt Text

The Dark Horse Of The Oil Price Rally

Vietnam is set to break…

Alt Text

Oil Prices Under Pressure As U.S. Shale Supply Soars

Continued production growth in the…

Alt Text

Carbon Pricing Won't Kill Big Oil

Big oil has agreed to…

Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

More Info

Trending Discussions

A Very Bullish Case For Commodities

Trading Screen

The fortunes of oil and gas producers have been dramatically different from metal producers this year. Energy prices have been lackluster, and energy stocks have fared even worse. Meanwhile, prices for a variety of metals have jumped sharply. Taken together, commodity prices broadly are more or less flat, but that obscures the very different performances between energy and metals this year.

According to a recent report from Goldman Sachs, entitled, “Metals Shine as Oil Volatility Dulls,” demand for all sorts of commodities has been very strong in 2017, both energy and metals included. “[A]ll markets are currently facing the best demand backdrop in over a decade with strong global synchronous growth,” Goldman wrote.

With demand strong for both metals and energy, the difference between the two sectors in 2017 has been on the supply side. There has simply been too much oil supply, keeping a lid on prices and depressing the value of energy stocks. Goldman says things have been worse for oil and gas producers than it expected, with the rebound in shale production exceeding forecasts.

But that hasn’t occurred in the market for metals. “Not only is there no shale equivalent in metals, energy faces excess capacity in services which keeps cost in?ation in check. In contrast, metals have less spare capacity and are facing cost in?ation,” Goldman analysts wrote in the October report.

Nevertheless, Goldman laid out a bullish case for the entire commodity sector, including oil. There are several reasons why the investment bank reached this conclusion. The first is based on the “maturing business cycle.” Specifically, we are at a particular point in the business cycle – phase 3 – called the “growth above capacity” phase, which is to say, “where commodities outperform other asset classes and policy makers are forced to put the brakes on growth,” Goldman argued.

The logic is that commodities perform well during periods in which central banks are tightening interest rates. That relationship comes down to the fact that central banks are trying to get a hold on rising prices – directly the result of rising prices for commodities. So, in essence, rising commodities prices force central banks to hike rates. But there is a window when commodity producers are doing really well before the tighter monetary conditions kick in. Industrial metals typically rise by 50 percent during the rate hiking cycle, according to the report. Currently, metals prices have jumped 25 percent, so there is more room to grow. Related: Why Oil Bulls Are Running Rampant

The second reason why Goldman thinks there is a bullish case for commodities is the return of backwardation, a situation in which near-term contracts trade at a premium to longer-dated futures. That scenario has been closely watched in the crude oil market – Brent reached backwardation a few months ago, and WTI is approaching a state of backwardation. This is a bullish sign for the market.

The reason backwardation has cropped up again is due to the rapid pace of declining inventories. This has been more visible in the oil market than it has for metals. Strong demand combined with OPEC production limits have kept accelerated the rebalancing process. Backwardation reinforces this dynamic by making it unprofitable to store oil. In metals, the situation is different. There isn’t spare capacity like there is for oil, which depresses longer-dated prices.

Over the long-term, Goldman is very bullish on metals prices. The bank touched specifically on the market for electric vehicles. Lithium supply, for example, needs to rise four-fold within the next ten years to meet EV demand. “Such dramatic growth was rare in the history of commodities,” the investment bank wrote. Demand for nickel, copper and aluminum are also set to soar, although much of the demand is expected to really kick into high gear beginning in the 2020s. Related: Is This The Cure To Saudi Arabia’s Oil Curse?

In short, the message from the investment bank is that the past year has been a relatively strong one for commodities, depending on the sector, while there is more room to run. Goldman reiterated a projection of 4 percent returns for commodities over the next 12 months, an upgrade from the 1 percent projection it had previously.

For oil, there is some short-term danger. Brent prices are hovering just above $60 per barrel, the highest level in over two years. As has happened repeatedly in the past, testing the upper limits of a trading range can often lead to profit taking from speculators, forcing prices back down. That presents some downside risk for oil right now. But overall, Goldman argues there are reasons to expect gains for commodities in the coming year.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:


x


Back to homepage

Trending Discussions


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News