SINGAPORE: Goldman Sachs, one of the foremost bulls on commodities, turned a near-term bear on Monday after conceding that global financial turmoil would take a far bigger toll on demand than first anticipated. “We have underestimated the depth and duration of the global financial crisis and its implications on economic growth and commodity demand,” its commodity markets research team lead by Jeffrey Currie said in a report dated Oct 13.

The bank, which has consistently been at the top of oil price polls for years, said in the report that it now expects US crude oil prices to end the year at around $70 a barrel, down from a previous forecast of $115 a barrel.

“However, should the financial and evolving economic crisis cut deeper into demand, the market could fall as low as $50, which we believe to be the industry’s cash cost and shut in level,” the analysts wrote.

US crude rose $3.11 or 4 percent to $80.81 a barrel on Monday as news of fresh European efforts to end the financial crisis revived prices from a 13-month low on Friday, when heavy selling and demand fears knocked prices 10 percent lower.

Goldman also cut its end-2009 price target to $107 a barrel from $125 and made an even deeper $37 cut to its average-2009 forecast, which it now put at $86 a barrel — making it the third most-bearish forecaster as of Reuters last poll on Sept 26.

The bank also cut its forecast for copper prices in three months to $3,500 a tonne versus and old forecast of $7,960, but predicted a recovery to $6,625 in 12 month’s time. London Metals Exchange three-month copper rose 2.5 percent to $4,920 a tonne. It also cut its three-month view on aluminium to $2,060 from $2,950 and saw a more measured rise to $2,600 in 12 months.

“As copper is the only base metal that remains substantially above its marginal cost of production even at the current depressed price levels, we believe that it remains the most vulnerable to further downside in the near term.”

MEDIUM-TERM UPSIDE

But the analysts also said recent events strengthened their argument for a structural bull market, as commodity producers are “highly dependent upon access to capital and were already struggling to grow production capacity before recent events.”

“While the swiftness and severity of the pullback in commodity and other asset prices stresses the ability of the industry to grow future production capacity, it also creates a much more unstable political environment in many of the producing countries around the world.”

“As a result, it is likely that the supply constraints that have propelled commodity prices to record-high levels in recent years will likely be even more binding as the credit crisis resolves and as economic growth regains positive momentum.

“This suggests the potential for substantial upside from commodity investments in the medium-to-longerterm.”

On base metals, it said infrastructure growth in China, the expansion of Chinese consumer demand for manufactured good and stretched production infrastructure supported a bullish case.

source: Economictimes

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