May 24, 2011
Turning more bullish as supply-shock concerns fade
Although near-term downside risk remains as markets adapt to a slower growth environment with supply-shock concerns fading, we now believe that the risk/reward once again favours being long commodities. Accordingly, we are shifting back to a near- to medium-term overweight recommendation, reiterating our long-term overweight and recommending fresh longs in oil, copper and zinc.
We remain structurally bullish commodities
Although we remain structurally bullish and have long argued the structural case for being long, timing does remain critical. This was evident in the recent market correction, which brought commodities down roughly 10% from their April highs. With prices now more inline with near-term fundamentals and price targets, we believe that the risk/reward once again favours being long commodities. Although the economy has likely shifted into a slower, but sustained, growth environment, we continue to expect that economic growth will likely be sufficient to tighten key supply constrained markets in 2H2011, leading to higher prices from current levels.
Raising oil price targets on persistent impacts from MENA events
We expect that the ongoing loss of Libyan crude oil production and disappointing Non-OPEC production will continue to tighten the oil market to critical levels in early 2012, with rising industry cost pressures likely to be felt this year. We are now embedding in our forecasts that Libyan production losses will lead to the effective exhaustion of OPEC spare capacity by early 2012. This raises our year-end Brent crude oil price forecast to $120/bbl from $105/bbl, our 12-month forecast to $130/bbl from $107/bbl and our end-2012 forecast to $140/bbl from $120/bbl.
Mid-cycle pause nearing a trough, creating upside to metal prices.
While a sharp decline in world economic growth remains a downside risk to commodity prices, we see the current slowdown in economic growth as part of a normal mid-cycle pause, partially driven by higher commodity prices, and therefore not a reason to expect commodity prices to decline substantially. Further, we believe that the recent evidence of economic weakness represents signs of a slowdown and not a downturn, which is reinforced by signs that Chinese metal demand has already returned with the SHFE-LME copper arb opening again, exchange inventories declining and the Shanghai copper forward curve moving into backwardation.
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Find on this link your very own download of the Goldman PDF out this morning (Tues May 24) saying loveydovey things about commodities going forward, but as a sample here's some of the script:
It then goes on to call long on things like copper gold and oil, but for me the most interesting call out of the Vampire Squid this morning is the new long call on zinc. Go read it for yourself to find out more.
Labels: goldman sachs