Commodity Bulls Gird for Another Run
Banks are urging their clients to stay the course during a monthslong commodities slump, predicting that prices will soon rebound.
UBS Wealth Management this week reiterated a buy recommendation on oil, with crude prices near their lowest level of the year. Goldman Sachs Group Inc. analysts doubled down Monday on their bullish view on oil, and TD Securities continued to predict that copper and other base metals would rise this year, despite a recent jump in warehouse inventories and sharp price declines.
Driving the bets are a more upbeat view of the global economy from previous years, when weak global growth made overproduction and supply gluts a more ominous threat. Now, investors are betting that more robust growth in the U.S. and abroad will over time clear away oversupply in oil and other raw materials, allowing prices to move higher.
"For the first time since the Great Recession, we have a situation where all major economies are pulling in the same direction," said Bart Melek, head of commodities strategy at TD Securities, referring to the period between 2007 and 2009.
Analysts at the bank have maintained upbeat long-term views on oil prices, which they expect to trade at $62 a barrel by the end of the year, from a close of $47.33 a barrel for U.S. crude on Wednesday. Copper will end the year at around $2.65 a pound, up from its current price of $2.4945 a pound, Mr. Melek forecast.
Prices for oil, copper and other raw materials surged at the end of 2016, driven in part by expectations that the new presidential administration would juice demand for goods and services by pushing through stimulative policies such as infrastructure spending and tax cuts.
But this year has so far disappointed commodity bulls, in part because of the administration's difficulties in pushing through legislation and in part because of more-global factors tied to specific markets.
Oil markets have been prone to selloffs this spring largely because U.S. stockpiles haven't fallen sharply, as many analysts had expected. Until recent weeks, the stockpiles spent most of the year rising to record highs after a deal from the Organization of the Petroleum Exporting Countries, Russia and other exporters to cut total output by 1.8 million barrels a day.
Ramped-up production from the U.S. and Libya -- which has an exemption from the OPEC deal -- and the return of Canadian output after brief outages earlier this year have canceled out some of the OPEC cuts, traders said.
Some investors also have been concerned about uneven economic data in the U.S. and China in recent months.
But in what has become a familiar refrain to investors in other assets that initially benefited from expectations of a policy-driven growth pop, it now appears that expectations in commodity markets may have outpaced reality in the first few months of the year, said Giovanni Staunovo, commodity analyst in UBS Wealth Management's chief investment office, which oversees $2.2 trillion in invested assets.
"We expect a recovery," Mr. Staunovo said.
His firm on Tuesday reiterated a recommendation to buy oil, expecting OPEC to extend production cuts at its May 25 meeting. Mr. Staunovo believes oil prices will rally to around $60 a barrel this summer. Higher oil prices also will lift prices for copper and other base metals, UBS said.
Commodity prices have historically perform the best when the Federal Reserve is raising rates, a study from Goldman Sachs showed. Annual returns for the S&P GSCI Commodity Index average 19% when the Fed is raising rates in response to a strengthening economy, the bank's research showed. The Fed has forecast two more rate increases this year.
Goldman predicts oil at $57.50 in the next three months, while aluminum will rise to $1,950 a metric ton, from around $1,865 a metric ton.
Write to Ira Iosebashvili at ira.iosebashvili@wsj.com
(END) Dow Jones Newswires
May 10, 2017 18:28 ET (22:28 GMT)