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Why Goldman’s commodities guru Jeff Currie is bullish on oil despite July’s pullback

By on July 29, 2022 0

Global oil prices fell in July, but Goldman Sachs commodities guru Jeffrey Currie touts strong upside risk for oil due to an “unprecedented” wide gap between global physical prices for oil. oil and oil futures prices.

The oil loss this month follows an overall decline in commodities that appears to be pulling the S&P Goldman Sachs Commodity Index SPGSCI,
+0.76%
down for the second consecutive month, after posting six straight monthly gains.

Lily: What does commodities have in store after the July losses?

“Physical markets are trading at a substantial premium to the futures market,” Currie, global head of commodities research at Goldman Sachs, told MarketWatch in an interview Thursday.

Physical Brent oil prices in the spot market traded around $112 a barrel on Thursday, while “paper oil or financial oil” – the first September futures contract BRNU22,
+2.66%
traded at around $106, with the Brent contract for October delivery BRNV22,
+2.27%

BRN00,
+2.27%
at $101.

One-year delivery of Brent oil costs $90, Currie said. “It doesn’t mean the price of oil should go down – it means consumers are willing to pay a big premium to take delivery of that oil today rather than tomorrow,” he said.

Price differentials between future deliveries “have never been higher”, he said. With current Brent prices at $106 and futures at $101, that’s a $5 discount. “This is unheard of.” Forwarding is a condition in which futures prices are lower than the spot market.

If prices stay at $106 for the rest of the year, rolling that first-month contract would net you $5 on the $101 contract each month through the end of the year, Currie said. “That’s a 60% return.”

For now, however, some traders are staying out of the market because they don’t believe the story persists, he said. They believe the energy and food crisis has been resolved and is behind us, and no one believes prices will go up because there’s probably a recession going on and ‘history says you don’t want be long on commodities for [a] recession.”

Even so, we are still in an environment where demand remains higher than supply despite slowing demand growth, as evidenced by the current drawdown on inventory, Currie said. “The telltale sign of a deep recession is contango, which we clearly don’t see now.” When the market is in contango, the futures price of a commodity is higher than the spot price.

Additionally, “we liquidated the full length of investors in this market,” Currie said, adding that as of last week there was about $60 billion in this market, up from $330 billion in March 2008.

For July, first-month Brent futures are on track for a decline of more than 7%, starting Thursday, but sought to pare some of those losses amid sharply higher prices on Friday. .

The first-of-September contract, which was due to expire at the end of Friday’s trading session, settled at $107.14 a barrel on the ICE Futures Europe exchange on Thursday.

The money could “come back,” Currie said. “We think there is a lot of upside risk in these markets, in the near term.”

A 60% return, if oil prices stay at $106 by year-end and the shape of the curve stays the same, is “a pretty attractive return for markets that do nothing,” did he declare.

So the risk reward for going long in oil here is “significant,” Currie said, with extremely tight positioning. The market also remains in deficit by a million barrels per day, with the recent price decline “potentially boosting demand by an additional million barrels per day”. Supply, meanwhile, remains severely constrained due to years of underinvestment, he said.

Also see: Why natural gas could be in store for more price gains after a 50% rise in July

Given all of this, Currie is bullish on oil. Goldman’s year-end target for Brent oil is $130 a barrel and $125 a barrel for US benchmark oil West Texas Intermediate.

Still, he warned of the volatility inherent in commodity trading.

“Commodity markets serve a real-world purpose of moderating demand and creating supply, which means they are going to be much more volatile than financial markets.”


—Jeffrey Currie, Goldman Sachs

“Unlike financial markets, commodity markets serve a real-world purpose of moderating demand and creating supply, which means they are going to be much more volatile than financial markets,” Currie said. .

Traders won’t get “a nice steady uptrend and supercycle-like environment,” he said. Instead, they will get “high prices…either to moderate the growth of demand based on supply or to create new supply.”

Currie also pointed out that if no one in this world has to buy a financial asset, they “have to buy physical commodities” such as food. This difference is “what is captured in this roller yield and offset” in the oil.