Commodity bull Goldman Sachs Group Inc. is undaunted by the sell-off in raw materials and is forecasting returns of about 17 per cent in the coming months, describing the current situation as unsustainable and touting this week’s G20 meeting in Buenos Aires as a potential turning point.“Given the size of dislocations in commodity pricing relative to fundamentals — with oil now having joined metals in pricing below cost support — we believe commodities offer an extremely attractive entry point for longs in oil, gold and base,” analysts including Jeffrey Currie said in a report. The note listed its top 10 trade ideas for 2019, including a rebound in Brent as OPEC cuts supply.
Raw materials have been battered in November on a toxic cocktail of drivers, with crude sinking amid speculation there’s too much supply, metals getting hit on concern growth is slowing, and investors fretting about the outlook for the trade war between the U.S. and China. This week, leaders from the G20 gather in Argentina, offering presidents Donald Trump and Xi Jinping a chance to address their trade spat, while Russia’s Vladimir Putin has an opportunity to address crude policy with Saudi Crown Prince Mohammed bin Salman.
“Many of the political uncertainties weighing on commodity markets have a significant chance of being addressed in Buenos Aires,” Goldman said. “This includes some improvement on the China-U.S. relationship and, like in the 2016 G20 meetings, some greater clarity on a potential OPEC cut.”
Here are some of Goldman’s top ideas for next year, as listed in the report:
Oil: Goldman expects an OPEC supply cut and its announcement will lead to a recovery in prices. It advises going long on short-dated Brent.
Oil: There’ll be a return to backwardation. The bank recommends selling an US$50 a barrel December 2019 WTI put option, which is currently worth US$7.25 a barrel as of Friday.
Gas: The recent rally in winter contracts, driven by a cold start to the winter, has dislocated the April 2019 natural gas contract, leaving it significantly backwardation versus October. The bank says this spread will continue to narrow.
Gold: The market has priced in 10 out of 12 of the Federal Reserve’s hikes that the bank expects, and the strong dollar trend is seen reversing. “If U.S. growth slows down next year, as expected, gold would benefit from higher demand for defensive assets,” Goldman said, adding that there may be additional support from central bank buying.
Agriculture: Go long Chicago soybeans, short on corn, bank says. “The upcoming G20 talks in Argentina are likely to be as important to the near-term direction of U.S. grain prices as summer weather normally is,” Goldman says. “Our view on the likely outcome of the meetings for the ongoing trade war (most likely a pause, but with some chance for normalization) is more optimistic than currently priced in by markets.”