The most influential bank in commodity markets believes the recent rally is unlikely to last and prices will reverse unless there is a sustained improvement in demand led by China, the world’s biggest consumer of raw materials, writes Neil Hume.
In a series of reports published yesterday, Goldman Sachs said the 20-month commodity rout had further to run and prices needed to stay lower for longer to rebalance markets that are still groaning under the weight of plentiful supplies.
“Demand hasn’t really changed, [so] it takes lower prices to push and keep supply below demand to create a deficit,” said Jeffrey Currie, Goldman’s head of commodities research.
Goldman has been consistently negative on commodity prices during the past 18-months, with Mr Currie forecasting that oil prices could fall to $20 a barrel. Brent, the international benchmark, hit $27 a barrel in January, down from the $100 it averaged between 2010 and 2014.
Mr Currie said the recent bounce, which took oil prices back to $40 on Monday, would ultimately prove “self defeating” because it threw a lifeline to the cash-strapped producers that were in a desperate battle for survival.
“It would reverse the supply curtailments that are expected to rebalance the markets in the second half of 2016,” he said.
US oil production has started to decline in the face of lower prices, though companies may keep output going if the price recovers further, probably damping the extent of any rally.
On iron ore, which posted its biggest one-day gain on record on Monday, with a jump of 20 per cent, Mr Currie said the surge was the result of a short-term rise in Chinese steel prices. Mills that have shut down during the rout may need to restart temporarily ahead of the peak construction season.