Commodities will reverse a rally that started in March as a stronger US dollar, cheaper oil and cooling China again pressure raw materials, especially copper, according to Goldman Sachs Group oInc.
Copper will lose at least 16 percent over the coming 12 months on China’s weakening demand growth and slowdown in construction completions, analysts including Jeffrey Currie said in a report e-mailed yesterday.
Oil in New York could fall to US$45 per barrel by October, while the US dollar continues its rise, pushing commodities prices lower as production costs slide, they said.
“We see downside pressures on commodity prices re-emerging,” the analysts wrote in the report dated on Friday. “The recent rise in commodity prices is clearly at odds with our lower-for-longer bearish view across the complex.”
The Bloomberg Commodity Index of 23 raw materials has risen 5.7 percent since hitting a 12-year low in March. Copper in London and West Texas Intermediate (WTI) crude oil both surged into bull markets after tumbling to their weakest points this year in January and March respectively.
Copper is the most exposed to a stronger US dollar and lower energy prices, as well as cooling demand growth from China, according to the report. The bank sees prices falling to US$5,200 per tonne in 12 months.
“We believe that current prices represent a very strong selling opportunity, for producers and investors alike,” Goldman Sachs wrote in the report. “Despite the recent partial retracement in prices, the structural bear copper narrative remains intact.”
Copper for delivery in three months on the London Metal Exchange lost 1.5 percent to US$6,161.5 per tonne on Friday.
LME copper spreads have softened over the past month, moving from backwardation to contango recently, which might reflect the weakness in the physical market evidenced by low or falling physical premiums, the report said.
The oil market will be oversupplied through next year even as demand rises, because the reduction in US rig count is not enough to outweigh rising production efficiency, Currie wrote. Low-cost producers Saudi Arabia, Iraq and Russia are also expanding output, according to the bank.
Energy producers have shuttered more than half of the US’ oil rigs since October last year, reducing production from the nation’s shale formations and stemming a rout in oil prices that began last year. WTI for July delivery rose 0.1 percent to US$59.80 per barrel in electronic trading on the New York Mercantile Exchange at 1:49pm in Tokyo. Prices are down 43 percent over the past 12 months.
Goldman is bullish on the outlook for zinc because of its high exposure to China’s infrastructure and automotive sectors, its relative lack of exposure to US dollar strength and the closures of the Century and Lisheen mines.
The analysts put their 12-month zinc forecast at US$2,500 per tonne. Zinc in London fell 0.6 percent to US$2,178 per tonne on Friday.
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