Commodities: Patience is working, but reflation requires time – Goldman Sachs

The research team at Goldman Sachs still believes that the commodities market needs more patience but suggests that the reflation will require additional time.

Key Quotes

“Oil prices have rebounded back to their pre-March sell off levels. Take out the weather driven sell-off in agriculture, commodity markets are back to the same place they were in late February and are seemingly facing the same questions as they were then. Will the survey macroeconomic data turn into strong hard macroeconomic data; will the Chinese credit data turn into real physical demand for metals; and will the OPEC production cuts turn into solid US oil inventory draws? We believe the answer to all of these questions is yes and that the base case logic remains intact.”

“We still believe that the market needs more patience. The macroeconomic data has been partially distorted by weather events in the US. In China, we still have no hard data yet for March to know whether the post-Chinese New Year rebound in activity has occurred, and the oil draws were not anticipated until second quarter. As a result, we maintain our overweight recommendation on commodities and our 3- and 12-month ahead forecasts of +5% and +4% respectively.  Due to patience, our 2017 top trading recommendation, long the enhanced GSCI, is back to being up 7%.”

“In addition, the strategic case for commodities remains as solid with cross-commodity and cross-asset correlations collapsing. We believe this is a direct result of the reduced uncertainty around long-term oil prices due to confidence in shale as the marginal source of supply. With shale now the dominant new resource base, the only uncertainty on the supply side is how much will shale cost to extract, not what technology the marginal barrel of oil will come from.”