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Warm winter riskiest for this commodity: Goldman

Warm winter riskiest for this commodity: Goldman

This winter's warm weather is a threat to commodity prices — but some more than others, Goldman Sachs said in a report on Tuesday.

The weather in both Europe and the U.S. has been much warmer than average in November and December and Asia has been hot and dry over the last few months, analysts at the investment bank said. This in part because of El Nino, the wild weather phenomenon that is forecast to be particularly strong this winter and is caused by the warming of certain parts of the Pacific Ocean.

Goldman Sachs said that El Nino could have a major impact for agricultural commodities — specificallycocoa, wheat and soybean — but that energy commodities were even more at risk.

"Large inventories mean that downside energy price risks are more acute than upside agriculture price risks," analysts led by Michael Hinds said in the report.

"Given significant oversupply, inventories have been building across most commodities since mid-2014 and negative demand shocks (or positive supply shocks) are now much more likely to have outsized negative price effects – particularly for commodities where storage is limited such as energy. As a result, we continue to see the largest near-term downside risks on distillate and crude oil prices."

A woman sits on a sand berm created by city workers to protect houses from El Nino storms and high tides at Playa Del Rey beach in Los Angeles, on November 30, 2015.
Mark Ralston | AFP | Getty Images

The warm weather could hit demand for natural gas and heating oil in the U.S. in particular, exacerbating pre-existing supply and demand imbalances.

Oil prices have tumbled since June last year, as U.S. shale gas production has risen and OPEC has maintained output, while demand from China, a massive consumer of commodities, has waned.

Brent and light crude prices crept higher on Tuesday, trading above $36 per barrel, from 11-year lows hit on Monday.

Energy Futures Chart

The U.S. Climate Prediction Center expects El Nino to remain strong through the Northern Hemisphere throughout winter and last until late spring or early summer.

The phenomenon is expected to hit the global supply of cocoa, wheat and palm oil, while increasing the supply of soybeans. Supply of metals could also be hit, although this is less certain.

"We find that the commodities with the highest concentration of supply in regions affected by El Nino are palm oil, cocoa, coffee, copper and soybeans. On the demand side, U.S. natural gas and heating oil are most exposed, " Goldman said.

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