World Economy

Oil Now One of the Hottest Investments

Oil Now One of the Hottest Investments  Oil Now One of the Hottest Investments

Goldman Sachs warns that investors are starting to cool on commodities and could miss out on further gains for the year’s best-performing asset class.

Earlier this week, the bank raised its outlook for its commodities index, which tracks assets like crude oil and copper. It now thinks the Goldman Sachs Commodities Index will return 8% over the next 12 months, up from its previous forecast for a 5% gain, CNBC reported.

Commodities are now posting their best year-to-date gains in a decade, according to Goldman. The fuel for that performance is crude oil. International benchmark Brent crude prices have risen more than 51% over the last year, while the cost of US crude is up nearly 45%.

“The rally likely has room to run, particularly from a returns perspective. Oil fundamentals are now more bullish as robust demand faces supply disappointments,” wrote Jeffrey Currie, Goldman’s global head of commodities.

But Goldman says the market’s mounting concern over a slowdown in global growth and rising US interest rates are weighing on sentiment around commodities. Goldman notes that record-setting long positions in oil—or bets that crude prices will keep rising—have moderated since the commodity crossed $73 a barrel.

Goldman thinks the market’s fears are largely unfounded, saying “Growth concerns will likely prove temporary” and “realized demand remains robust.”

Brent crude briefly topped $80 a barrel on Thursday, approaching Goldman’s target of $82.50. Falling output in Venezuela and Angola and bottlenecks in America’s premier shale oil region threaten to leave a finely balanced market undersupplied by about one million barrels a day, Goldman says.

It also stresses that physical markets—the buyers who actually take delivery of commodities to meet real-world demand—tend to ignore growth concerns and rising rates. They also tend to shrug off a strengthening US dollar, which makes commodities priced in the greenback more expensive to holders of other currencies.

In other words, the world doesn’t stop consuming things like corn, copper and crude just because of headwinds that might sideline financial traders, who swap derivatives to take advantage of rising or falling prices.

The bank also notes that the 14-member oil producer group OPEC is currently limiting its output—and it has historically failed to restore production fast enough to meet demand. That means OPEC’s current deal with Russia and other producers to keep 1.8 million barrels a day off the market is likely to cause at least a short-term undersupply of oil.

Add new comment

Read our comment policy before posting your viewpoints