Goldman Sachs’ highlighted its call on commodities, written by Daan Struyven, who leads Goldman Research on the Oil Markets.
Commodities hit lows in late 2020, before peaking in mid-2022, and then facing retracement since then.
Although gold (XAUUSD:CUR) made an all-time high in late December, surpassing $2,086, it is down 2.11% from a month ago, and “a lot of people have lost the broad trail on commodities since the highs,” said Tony Pasquariello, global head of Hedge Fund Coverage for Goldman Sachs in a FICC and Equities report, published on Wednesday.
Struyven said that elevated geopolitical uncertainty supports the hedging value of commodities. Power and green metals (GDX) demand, as well as commodity supply, will be boosted by the rise of artificial intelligence.
In addition, decarbonization will likely require higher commodity indices “to attract much higher investment, and to compensate for higher demand uncertainty,” said Struyven.
GS analysts see value in commodities and expect higher prices to be the result of improved cyclical backdrop. “Structural tightness in green metals and refined oil products (PARR), (MPC), (CVR), and significant hedging value against potential geopolitical negative supply shocks.”
OECD (Organization for Economic Cooperation and Development) commercial oil stocks’ spare capacity is at 6% of global demand because of OPEC supply cuts and U.S. shale supply growth, said Struyven.
“While this spare capacity effectively delays the oil super cycle, it doesn’t necessarily prevent it, given how tight long-term supply drivers such as oil reserve life and oil capex still look,” he said.
In addition, GS analysts expect oil production refining to remain tight. Estimates of the global refining utilization rate are at 90th percentile of history. “The tightness and vulnerability in refining reflects very limited investment in new long-cycle refineries given demand uncertainty, and pandemic closures.”
The wars in Russia-Ukraine and the Middle East, which are two major producers of oil and gas, continue to be headwinds. A potential closure of the Strait of Hormuz could lead to a 20% increase in oil prices in the first month of an interruption — he said — “with prices eventually doubling if the disruption persists, and even larger prices increase for European natural gas. options pricing” suggesting that “the geopolitical risk premium priced into oil markets is now modest.”
Finally, the green metals economy, including EVs, renewables, and grid energy, have driven “surprisingly strong” China demand for metals such as copper (HG1:COM) and aluminum (DJCIIA) last year.
“The structural green tailwind should boost global green demand for aluminum and copper by more than 20% in 2024,” Struyven said. “We expect global copper mine supply to peak over 2025-2026.”
