Commodities: Physical Re-Balancing Not Complete – Goldman Sachs
Research Team at Goldman Sachs, notes that the sentiment in commodity markets has clearly shifted towards being more bullish.
“With steel rebar leading the charge following robust Chinese credit data and oil trading to the top end of our inflection phase trading range of $45/$25 , this leaves the most important question of whether this is the beginning of a sustainable, broad-based commodity rally that marks the end of the inflection phase. While this recent rally has the potential to run further to the upside, with the biggest risk that the Fed chooses not to hike in the coming months despite improving Chinese activity, we believe that it is not yet driven by a sustainable shift in fundamentals. In oil, we do not anticipate a sustainable shift in fundamentals until 3Q16, which creates near-term downside risks. Specifically:
1) The rally has been far stronger in the oil and steel complexes, commodity sectors that have seen near-term, transient, supply adjustments.
2) The steel complex also benefits from a high level of exposure to the credit led pick up in Chinese infrastructure activity, which was put in place by Chinese policy makers to contain fears over systemic risks earlier this year that have passed.
3) The reflationary pressures from 1) and 2) were reinforced by the macro backdrop of a more dovish Fed worried about Chinese growth and commodity producers which weakened the US dollar and reinforced a stronger China and higher commodity prices."