Goldman Sachs has called a bottom to the correction in commodity markets, advising clients to buy oil, copper and zinc after a 9 per cent price fall since the start of May.
Last month, the bank caused a stir when it recommended cutting exposure to commodity markets, arguing that oil prices had “pushed ahead of where fundamentals currently suggest.”
A few weeks after Goldman’s bearish call, commodities suffered one of their sharpest one-day falls on record, with oil falling by up to $12 a barrel in a day. (Read More: Commodities Note—Oil Blame Game Is Back)
On Tuesday, however, Goldman reversed that call. In a note to clients, the bank argued that the correction in prices since the start of the month had created “a good entry point for long positions”.
Goldman’s commodity strategists said: “The recent pull back in commodity prices brings the market back towards levels more consistent with the global growth story that was being priced in before events in Libya forced all the financial markets into pricing a supply shock environment”.
They raised their forecast for Brent crude oil to $120 a barrel by the end of 2011 and $130 in 12 months, from current levels of $111. Copper would rise to $11,000 a ton in 12 months from the current $8,923, they said.
The bullish call brings Goldman in line with other leading commodities banks. Morgan Stanley on Tuesday raised its forecast for the average Brent price to $120 a barrel for this year and $130 for next year.
Hussein Allidina, head of commodities strategy at the bank, argued that a failure by OPEC, the producers’ cartel, to raise output at its next meeting on June 8 would lead to a sharp drawdown in inventories.
He said: “Although higher prices will temper demand, without an increase in Opec production, the loss of some 1.5m b/d of Libyan production and still-firm demand in the emerging markets will contribute to tightening inventories meaningfully”.
JPMorgan is forecasting an average Brent price of $120 this year while Barclays Capital predicts $112.
Goldman also recommended buying copper and zinc, arguing that the current soft patch in the Chinese market was near an end. It pointed to a drawdown in copper inventories in the country and a narrowing of the price differential between the global copper market and Chinese prices.
The bullish calls helped lift sentiment towards commodity markets on Tuesday morning. Brent crude, the benchmark, was by mid-morning in London trading $1.18 higher at $111.28 a barrel; copper, the industrial bellwether, was up 1.3 per cent at $8,923 a ton; and zinc was 1.6 per cent stronger at $2,159 a ton.
The newly-listed shares of Glencore, the world’s largest commodity trader, also received a boost, gaining 1.95 per cent to 524p—although they remain below their listing price of 530p.