Goldman says commodities rally not backed by fundamentals

London (Apr 22)  The recent rally in commodity prices is not supported by fundamentals in the physical markets, Goldman Sachs said, adding that oil could see downside risks in the near term.

"While this recent rally has the potential to run further to the upside ... we believe that it is not yet driven by a sustainable shift in fundamentals," Goldman Sachs analysts said in a note on Friday.

"Given the near-term and temporary nature of the current re-balancing and the lack of longer-term sustainable deficits in any of the markets, it is premature to embrace these 'green shoots' and shift to an 'overweight' recommendation in commodities."


Copper, iron ore and silver, all used widely in manufacturing, have rallied in recent days on hopes of better demand from top consumer China. Gold and other precious metals have also been buoyed by a softer dollar and a dovish Federal Reserve.

Soybean and corn futures reached their highest levels since July on concerns about adverse weather in South America. Oil prices were on course for solid weekly gains on Friday despite ongoing oversupply.

The bellwether Thomson Reuters/Core Commodity CRB Index that tracks 19 major commodities hit its highest level since December on Thursday.


Goldman Sachs, however, has been underweight commodities since May last year and reiterated its bearish view on Friday.

Oil fundamentals will not see a sustainable shift until the third quarter, creating near-term downside risks for prices, Goldman said. But it changed its view on energy to 'neutral' from 'underweight,' citing the reduced likelihood of an extreme downside.

"We believe the current decline in U.S. oil production is still insufficient to offset low-cost supply growth such as Iran, particularly should disruptions in Iraq, Nigeria and Venezuela reverse," Goldman said.


"The biggest risk to the upside in the near term is the Fed choosing to remain dovish despite the improvement in Chinese activity, which could easily push oil above $50."

Iron ore, which has gained nearly 30 percent this month, will fall to $35 per tonne by the end of 2016, Goldman said. Iron ore for immediate delivery to China's Tianjin port .IO62-CNI=SI jumped 6.8 percent to $68.70 a tonne on Thursday.

"The current rally is unsustainable in the absence of a material increase in Chinese steel consumption that can absorb incremental supply from mine expansions in Australia, Brazil and other regions," it said.

Goldman maintained its underweight view on base metals, saying base metals have not seen the lows yet in this cycle, and reiterated its recommendation to short gold, which has risen 17 percent so far this year.

Source: Reuters