Commodities are this year’s best-performing asset class, with crude oil continuing to recover from its worst crash in over four decades.
But the lingering impact of that crash is precisely why many investors are still nervous about diving in, to the dissatisfaction of Goldman Sachs’ commodity strategists. They’ve been overweight the asset class since 2016, and they said in March that there was no better time in the past decade to invest in commodities.
“Surprisingly, markets remain complacent,” Jeff Currie, the firm’s global head of commodities, said in a note on Wednesday. “Oil speculative net long positions have been declining since $73/bbl with the common manta, [sic] ‘we will ride this one out.’ These are dangerous words from a risk management perspective.”
Brent crude oil, the international benchmark, traded up 0.91% to $80 a barrel on Thursday, or nearly 10% above the level at which traders started paring bets that oil would rise. Brent has gained nearly 52% over the past year as some OPEC producers including Saudi Arabia implemented production limits more aggressively than expected. More recently, supply concerns mounted over Iranian oil as the US announced it was exiting the nuclear deal.
Currie and his team see Brent rising to as high as $82.50 a barrel. They raised their forecast for the S&P GSCI commodity index returns this year to 8% from 5%.
“This current rally has room to run, particularly from a returns perspective, as the current fundamental backdrop for oil is now more bullish than we had expected as strong demand now faces supply disappointments,” Currie said.
He’s referring to the fact that first-quarter production levels for various producers outside the US, and globally, fell short of forecasts made by the International Energy Agency.
The length of this economic expansion — now the second-longest ever — is another reason investors are skittish. That’s because, as Currie illustrated in a previous note, returns are usually very weak during the early contraction and recovery phases of the cycle. They are usually marked by production that exceeds demand, just as we witnessed a few years ago with the boom of US shale oil and Saudi Arabia’s response.
Currie added that oil supply from OPEC usually doesn’t catch up to demand this late in the economic cycle to refill inventories before a recession hits.
“Growth concerns will likely prove temporary, realized demand remains robust and OPEC has never been able to catch late-cycle demand growth to replenish inventories before a recession occurs,” Currie said. “And even if growth were to decelerate sharply, it would take global GDP growth collapsing to 2.5% yoy to simply balance the oil market! As a result, we highly recommend not ‘riding this one out.'”