Expectations for a decreased oil supply, potential Chinese stimulus and political uncertainty are buoying hopes for gains in the commodities sector, according to Goldman Sachs.
Jeff Curries, global head of Commodities Research at Goldman Sachs, told CNBC on Wednesday that the bank is bullish on commodities oil and gold for several reasons, ranging from the Federal Reserve signalling it will hike rates less aggressively than expected and a weakening dollar.
"We're bullish on commodities," Goldman's Currie told CNBC's Joumanna Bercetche. "One, because you don't have the rising (interest) rates anymore and in fact, they've come off and they're on pause. Two, the dollar's really strong and likely to weaken from here as opposed to strengthen like it did last year." A weaker dollar makes oil more attractive as oil is denominated in dollars.
Oil markets got a welcome boost when OPEC and its friends decided to cut supply again in December, another push is coming from news of Chinese economic stimulus that could propel demand. Oil prices rose 3 percent overnight on expectations that production cuts will tighten supply. On Wednesday midday, Brent futures stood at $60.37 per barrel and WTI at $51.70.
Currie added that a predicted rise in Chinese demand and falling global oil supply also added to the bullish outlook for oil.
"China has given notice that it's stimulating (its economy) and then you have OPEC ready to cut production," he said, speaking to CNBC at Goldman's global strategy conference in London.
China's central bank injected a net 560 billion yuan ($83 billion) into the banking system on Wednesday, the highest ever recorded for a single day, in a sign that it's willing to inject liquidity into a slowing economy. Chinese economic growth is driving higher oil demand.
Fear and wealth
Oil markets breathed a sigh of relief when OPEC and its non-OPEC announced in December that they would cut production, again, in a bid to stabilize a repeated fall in oil prices amid growing supply.
U.S. sanctions on Iran instigated in November failed to have as deep an impact on supply as forecast as a handful of waivers were granted to oil consuming countries, taking away a need for oil kingpins Saudi Arabia and Russia to produce more to fulfil a potential shortfall. Currie said an excess of oil built up ahead of the production cut would clear in early 2019.
"They're cutting. They had a huge increase in production in September, October and November in anticipation to the Iranian sanctions and we got a lot more waivers than expected and they're now bringing that supply off the market. It did leave the market with an extra 140 million barrels that need to be eaten through during the first half of the year. We think that's likely to happen," he said.
He said a "terrible trio" of factors had affected oil's performance in mid-2018. "Rising rates, rising dollar and rising oil. You put those three together and they either always lead to a recession or to a mid-cycle pause. Now we look at it and go 'hey, the Fed's on pause', we're in a mid-cycle pause and that's usually a buy signal for commodities."
With economic and political uncertainty still clouding the wider global outlook for 2019 with trade tensions still unresolved and political infighting in the U.S. and Europe, Currie noted that gold, a safe-haven asset for investors, would also likely receive a boost. On Wednesday, spot gold stood at at $1,288.7 per ounce amid caution ahead of a no-confidence vote on British Prime Minister Theresa May's government.
"We talk about fear and wealth in gold and you have the fear factor- you look at economic uncertainty in China, in the U.S. right now, it's off the chart. But we need the wealth factor from the emerging markets - you need the Indians to buy oil or gold," he said.