INSUBCONTINENT EXCLUSIVE:
By Pratish NarayananThe case for owning commodities has rarely been stronger, according to Goldman Sachs Group Inc.
With raw materials
rallying on escalating political tensions across the globe and economic growth remaining strong, the bank’s analysts including Jeffrey
Currie doubled down on their “overweight” recommendation
They reiterated a view that commodities will yield returns of 10 percent over the next 12 months, according to an April 12 note.
The
Bloomberg Commodity Index is up more than 2.5 percent this week, the most in two months
Another raw materials gauge, the SP GSCI Index, has rallied over 5 percent this week to levels last seen in 2014.
The gains are being driven
by crude, which is set for its best weekly jump since July, and aluminum, poised for its strongest rally since 1987
Oil investors are rattled by the potential for Middle East supply disruptions in the wake of the U.S
threatening to bomb Russian ally Syria, Saudi Arabia shooting down missiles fired by rebels in Yemen, and rising concern that America would
reimpose sanctions on Iran and curb its exports.
In the aluminum market, U.S
sanctions on Russian producer United Co
Rusal, the biggest maker of the metal outside China, have sent buyers scrambling to find supplies.
“With low cross-asset correlations,
increasing inflationary risks, a positive carry and the potential for oil supply disruptions in the Middle East, the strategic case for
owning commodities has rarely been stronger,” the Goldman analysts wrote in their report.
Brent crude, the benchmark for more than half
the world’s oil, has risen 7.8 percent this week to $72.33 by 11:01 a.m
West Texas Intermediate futures are up 8.6 percent on the week at $67.38 a barrel in New York as the escalating tensions have taken investor
focus away from concern that an American crude boom will undermine OPEC’s output curbs to clear a global glut.
The missiles fired at Saudi
Arabia by pro-Iranian Houthi rebels in Yemen and the prospect of U.S
retaliation against Syrian President Bashar al-Assad -- whose forces are backed by both Russia and Iran -- for a suspected chemical weapons
attack raises the risk of supply disruptions, Goldman said.
“The unilateral nature in the escalation of tensions so far suggests that the
production impacts would likely be modest initially unless a military conflict occurs between Saudi Arabia and Iran,” the bank’s
“With low and declining inventories the market remains vulnerable to even small disruptions.”
Sanctions ThreatThere’s also increasing
will pull out of a deal between Iran and global powers that eased sanctions on the OPEC nation in exchange for curbs on its nuclear program
The appointment of John Bolton as National Security Advisor and Mike Pompeo as Secretary of State, both vocal Iran hawks, has significantly
increased the odds of sanctions being reintroduced by President Donald Trump’s administration, Goldman said.
If that happens, European
refiners may cut imports from Iran, given their exposure to the U.S., either through assets or product trade flows, according to the bank
“The EU accounts for 25 percent of Iran’s 2.6 million barrel-a-day crude exports but we believe the key for the global oil market is
whether these flows will be curtailed rather than simply redirected to Asia,” the analysts wrote.
In the aluminum market, all parts of the
supply chain are rushing to assess the risks of handling metal from Rusal, a company that Goldman said represents 6 percent of global output
The moves will drive significant disruption in the near term, according to the bank, which flagged upside risks to its end-year forecast of
$1,950 a metric ton.
“We now expect aluminum prices to remain high and volatile through early June when markets will be forced to come to
terms with the structure of the sanctions,” the Goldman analysts wrote.
Prices on the London Metal Exchange have jumped more than 13.5
percent this week to $2,320 a ton after surging to a six-year high on Thursday
Aluminum’s gains on the LME have outstripped increases in China in the past week, potentially making exports more profitable for the Asian
nation’s traders just as their domestic market struggles with bloated stockpiles.
That dynamic, and a collapse in Rusal’s share value,
will “incentivize a restructuring of Rusal’s assets and redirect global aluminum flows to establish a new equilibrium,” the Goldman
“There is significant upside risk and potential volatility as markets find the new equilibrium.”
