Why Goldman Sachs is Bullish on Oil and Copper

Brian Hicks

Written By Brian Hicks

Posted March 13, 2013

All eyes are on oil and copper as far as Goldman Sachs (NYSE: GS) is concerned.

Copper demand is expected to rise in the 2013 second quarter, due to Chinese growth in infrastructure, property sales, and construction, as reported by CNBC.

China also plays a role in Goldman Sachs’s focus on oil, since the Chinese heavily depend for oil to keep their economy alive. Emerging oil demand among developing nations, low global inventory, and a decrease in spare OPEC reserves makes oil one of the more sought-after short-term commodity gains.

The short-term speculations are a green light for traders to strike while the iron is hot, and it all depends on the market you may be interested in.


Goldman Sachs expects copper to hit $9,000 per tonne (or per metric ton) in the next six months, according to Mining Weekly.

China may be the basis of copper prediction, but Goldman is also betting on the American housing market to make a comeback in 2013. A thriving housing market in the U.S. means more construction and higher demand in copper.

China may be the focus, but Reuters reports home prices in the United States have made something of a comeback in recent years, and if all goes well, Goldman’s predictions in the copper field could be better than expected in the long-term.

Numerous copper sell-offs of amid market speculation was one thing that irked Goldman. Analysts believe that short-sells stem from concerns regarding Chinese restrictions on the housing and economy, and a weak PMI (purchasing managers’ index), according to Mining Weekly.

Goldman believes sell-offs from market trends were overdone, and the company believes the short-term sell-offs in raw materials like copper were based entirely on concern for possible slower growth in the Chinese economy.

According to Invezz, Goldman believed that traders should have focused on commodity prices as opposed to trend forecasting.

From Invezz:

“On February 8, Goldman forecast a 1.1 percent gain in commodities in 12 months. In its latest note, however, the bank estimated that the Standard & Poor’s GSCI Enhanced Commodity Index will climb three percent in 12 months, where the biggest contributors to the rise would be industrial metals gaining seven percent, livestock adding five percent and energy increasing by three percent.”

Goldman is basing its model on the construction season in China, and it is no surprise that the U.S. bank predicts an increase of $8,000/t by year’s end—the same time Chinese construction winds down.

Betting on China is always a sure thing because of its bustling economy and sprawling infrastructure. Chinese construction rarely slows down because of government investment, and when it comes to private property rights vs. government interest, Chinese officials and construction will win every time.

In a rising economy such as China, traders can expect rewarding return in the commodities sector. China is one of the largest consumers of raw materials and energy resources, including oil.


China is the second largest consumer of oil in the world, behind the United States, so it is no surprise that Goldman based its oil predictions on trends in the American and Chinese markets.

Brent crude, the international standard for oil prices, fixed oil prices at $105 per barrel, as reported CNBC, and Goldman compared this price to the second largest standard, West Texas Intermediate, with a price of $97 per barrel. Goldman averages the spread between these two trading classifications with a $7.50 difference, which is not a bad model to go by, since the current gap is $19.

Backwardation, a downward trend when short-term contracts are higher than future contracts, is the basis behind Goldman’s favor with oil.

According to Bloomberg, the spread will result in “a three-month return of 6 percent for petroleum investments.”

The market data certainly reflects the situation. In March, Goldman expects a surplus of crude in Cushing, Oklahoma, but this spurt will trend downward as a new pipeline between the Permian Basin Texas fields will connect Cushing with other oil refineries in the Gulf Coast.

Cushing is important because of the town’s oil link with the New York Mercantile Exchange, according to Bloomberg. This will drain a large portion of crude away from Cushing, and it will be a key factor in narrowing the spread.

By using two of the largest benchmarks for oil, it appears Goldman’s model is accurate. Goldman also claims the sell-offs from weak U.S. demand were premature and based too much on market trends, as was the case with copper. CNBC highlights natural gas exploration projects in shale regions as reasons for low American demand.

While some analysts may see the low dip as a reason to sell, Goldman saw this as a hiccup in the market and something to watched, but not acted upon. The company factored in geo-politics with the unusual downturn as a reason to hedge bets and not sell; however, geo-politics could go in multiple directions, so Goldman is taking quite a risk with such an analysis. But Goldman saw the recent dip as unusual and did not put much credence in a potential long-term slump.

Copper and oil are two of the most important markets to invest in. Goldman highlighted two investment models that show signs of growth in the short-term, in the wake of China’s booming construction industry and housing market, along with the sleeping giant that may be the American, housing market.

While Goldman’s analysis is not the official blueprint for commodities, it can be a good direction for eager traders to follow.

Good Luck Investing,

Jon Carter 


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