Oil to rise later this year: Goldman
London, May 20, 2010
Oil should strengthen and the market structure return to backwardation later this year provided inventories shrink as expected, the global head of commodities research at Goldman Sachs said.
Oil fell to a low of $67.90 on Wednesday, its weakest since September last year, pressured in part by huge volumes of inventory in Cushing, Oklahoma, which Currie said should be temporary.
'$65 a barrel, particularly in WTI (US crude), is not that far off, but there are idiosyncratic events in Cushing. We're going through the shoulder months. Inventories are building right now, but as you look out towards the summer driving season and into summer, we become much more positive,' Jeff Currie told Reuters Insider television.
High volumes of inventory in the United States have helped to sustain a deep contango -- a market structure associated with surplus supply -- for well over a year, but Currie predicted oil could switch to the opposite condition of backwardation.
'The key there is we need to see a significant inventory draw this summer. If we see inventories draw substantially in the summer as we expect, we could see the curve flatten out and move towards backwardation some time by the end of the summer.'
Goldman Sachs and other analysts have previously predicted a return to backwardation, which is of particular interest to investors whose returns are enhanced when oil is backwardated.
Industrial metals have also weakened, with copper for instance falling to a three-month low earlier this week. 'We think in industrial metals, particularly copper, it's an excellent opportunity,' Currie said on the sidelines of the World Mining Investment Congress.
'Take copper, inventories are drawing, demand pull out of China's very strong and the LME-Shanghai arbitrage is still wide open, all supporting much higher copper prices.'
In the long term, copper, crude oil, and platinum are the commodities with the best fundamentals because of supply constraints, Currie said.
'The PGMs, copper and crude are the ones that are supply constrained and also have a dynamic as the economy continues to recover.'
Zinc is also attractive, with possible supply problems about 18 months away, he told the conference. Nickel and natural gas, however, have plenty of supply so their price outlook is not bright, he added.
The gold price should remain strong and investors should stay long until central banks begin to hike interest rates, Currie told the conference.
When a central bank tightens, gold will react in terms of that nation's currency, he added. 'Pick your currency . . . When you think the liquidity is going to be yanked out of the system, then short gold in that currency.' - Reuters