Goldman raises outlook on commodities, sees 15% return over next 12 months

Published Tue, Mar 2 20219:03 AM ESTUpdated Tue, Mar 2 202112:57 PM EST

Goldman Sachs raised its outlook for the commodities sector over the next year as the economic recovery gains steam. Strong fundamentals and supply constraints are boosting commodities as demand recovers, the bank said. The sector is a beneficiary of the "reflation trade," which involves assets that are expected to fare well in a period of economic growth. The firm recently raised its forecasts for oil, metal and grain and now expects the commodities sector to return 15.5% over the next 12 months. This is on top of the group's 15% gain this year, making it the best-performing asset class by a "long shot," Goldman said Monday. "Structural impediments on supply have created [a] sustainable deficit," Goldman global head of commodities research Jeff Currie wrote in a note to clients. "We believe this is the beginning of a new structural bull market in commodities, and with every market but cocoa and zinc in a deficit we maintain our conviction in this view." The firm said commodities are benefiting from stronger-than-expected economic activity, which is putting pressure on supply as demand increases. Goldman also noted the manufacturing cycle has been restarted after two years of trade wars. "We believe commodities are pricing a late cycle expansion, precisely because the physical side of the economy is above trend and growing," the firm said. Goldman sees West Texas Intermediate crude hitting $72 per barrel by the third quarter, with Brent crude reaching $75 per barrel. Goldman's prior forecast had European Brent at $65 during the third quarter. WTI traded around $60.89 per barrel on Tuesday, while Brent was at $63.85. Oil is coming off its fourth-straight month of gains, and Goldman noted that the supply response hasn't kept pace with what is usually seen after a price surge. Among other things, OPEC and its oil-producing allies implemented historic supply cuts last year as prices tumbled. The group should also benefit from rising inflationary fears since it can act as a hedge against it, Goldman said. "Commodities have sat at the heart of this reflation story and we believe the key here is that this reflation push is demand driven, not cost push inflation, despite being centered on rising commodity prices," the firm said. "Moreover, commodities are the crucial link between growing demand, a weaker dollar and inflation, which is why they have been statistically the best hedge against inflation," Goldman added. —CNBC's Michael Bloom contributed reporting.

Heavy equipment works on a piece of the Keystone XL crude oil pipeline lies north of Oyen, Alberta, Canada February 1, 2021.

Todd Korol | Reuters

Goldman Sachs raised its outlook for the commodities sector over the next year as the economic recovery gains steam.

Strong fundamentals and supply constraints are boosting commodities as demand recovers, the bank said. The sector is a beneficiary of the "reflation trade," which involves assets that are expected to fare well in a period of economic growth.

The firm recently raised its forecasts for oil, metal and grain and now expects the commodities sector to return 15.5% over the next 12 months. This is on top of the group's 15% gain this year, making it the best-performing asset class by a "long shot," Goldman said Monday.