Goldman forecasts 20% drop in commodities as oil rally fades

[SINGAPORE] A gauge of global commodities prices may drop 20 per cent over six months as rising supplies drive oil and copper lower, according to Goldman Sachs Group Inc.

While prices rallied as money flowed into exchange-traded funds tied to oil, markets are well supplied and crude stockpiles are forecast to continue rising, analysts including Jeffrey Currie in New York wrote in a report dated March 13.

Commodities investors will see total returns of 4.5 per cent if they retain their holdings for 12 months, the bank said.

"The recent oil exchange-traded fund inflows are arriving too early and could reverse," the analysts wrote. "We don't believe prices have reached a trough yet."

The Standard & Poor's GSCI commodity index has rebounded 7.5 per cent from the lowest in almost six years in January as crude rallied on speculation that demand is improving and a slowdown in US output will shrink a global supply glut.

Still, US inventories and production are at the highest levels in more than three decades and Oman estimates the market is oversupplied by 1 million to 1.5 million barrels a day.

Goldman forecasts that the S&P GSCI Enhanced Total Returns commodity index, which takes into account gains or losses from rolling futures contracts forward as well as changes in the underlying price, will slide 18 per cent over the next three months and 20 per cent over 6 months. The index is down 6.3 per cent this year. The Bloomberg Commodity Index of 22 raw materials is 5.5 per cent lower in 2015.

US inventories will continue to build at a "rapid pace," according to Goldman. Stockpiles rose for nine weeks through March 6 to 448.9 million barrels, the most in Energy Information Administration records dating back to August 1982. The nation pumped 9.37 million barrels a day, the fastest pace in data compiled by the Energy Department's statistical arm since January 1983.

The number of rigs drilling for oil in the US was at 922 as of March 6, dropping for a 13th week, according to data from Baker Hughes Inc, a services company.

The rig count needs to fall as much as 30 per cent further and US benchmark oil prices need to drop to US$40 a barrel over the first half of 2015 for the market to rebalance itself, Goldman said. West Texas Intermediate crude for April delivery was at US$46.04 a barrel in electronic trading on the New York Mercantile Exchange, down US$1.01, at 12:20 pm London time. Brent in London was at US$56.51.

Goldman also projects copper prices to extend declines amid weaker demand from China, the world's top consumer, and as inventories of the metal climb this year and in 2016. China's industrial output, investment and retail-sales growth missed analysts' estimates in January and February, signaling the country is behind its economic targets.

Falling energy prices and the weakness of currencies in producer countries will help push down output costs, weighing on prices of the metal used in everything from cabling to plumbing, Goldman said.

Copper for delivery in three months fell 7.4 per cent this year to US$5,836.50 a metric ton on the London Metal Exchange. Inventories in bourse-tracked depots have expanded by 88 per cent to 333,575 tons, the highest since January 2014. Production will exceed demand by 501,000 tons this year, according to Goldman's Jan 23 report.

"We are more bearish and expect that visible inventories will continue to grow," Goldman analysts said.

BLOOMBERG