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Goldman Sachs Raises Outlook for Commodity Stocks

Goldman has been completely on target with its commodity stock research and analysis. There is a lot of talk about demand destruction which has crushed the energy, ag and metals stocks. However, Goldman believes (as do I ) that this is just a temporary correction in a continuing bull market. The graph above shows the long-term chart for the Oil Service Holders ETF which represents the index for oil service companies. You can see that in spite of the current correction, those companies remain in a long-term bull market and that there have been corrections all along the way during this bull market. They are never fun to experience or to wait out, but they run their course and the stock prices push higher as the weak hands are shaken out.

Below is the article from Goldman published this morning.

Commodity demand restrained, but not destroyed

We continue to believe that recent demand weakness is likely transient, as rising prices have been required to constrain demand in line with supplies. The negative macro sentiment may constrain near-term commodity upside. But we believe that supportive fundamentals remain intact and that the recent sell-off is increasingly providing buying opportunities.

Demand concerns have driven negative commodity performance

Commodity prices and returns as measured by the S&P GSCI Enhanced Commodity Index plummeted in July and have declined further in recent days. Broadly driving these declines has been a substantially negative shift in sentiment, owing largely to concerns about commodity “demand destruction” in the context of both slowing global economic growth and substantial commodity price increases this year. Concerns about increased supply availability – owing to OPEC production increases and substantial improvement in the US corn and soybean harvest outlooks – have also contributed to recent sharp price declines.


Demand restrained, but not destroyed

We continue to believe that US oil demand weakness has been necessitated by extremely disappointing non-OPEC crude oil supply growth in the context of still strong emerging market demand, which explains the lack of a meaningful inventory build, despite the weak US demand. As rising prices explain the magnitude of the recent demand weakness, it is likely that such demand weakness is temporary rather than permanent demand destruction and could reverse substantially following the recent sharp price declines. We believe a similar dynamic has taken place in the agriculture markets, with the recent price retrenchment given improved harvest outlooks likely stimulating sufficient demand to keep soybean and corn balances tight.


Raising 12-month returns forecasts on recent price declines

Although the negative macro sentiment may limit near-term commodity upside, we believe constructive commodity fundamentals remain intact and that potential upside is strongest for oil, soybeans and corn. We are raising our 12-month energy, agriculture and precious metals return forecasts on recent price declines, leading to an upward revision in our forecast of the S&P GSCI Enhanced Index to 17.9% from 9.3% previously.