Every week the Goldman commodities team puts out the same note repackaged as new:
Volatility and tighter spreads go hand-in-hand. As the global energy crisis continued to grip markets in October, first coal-to-gas then gas-to-oil switching contributed to broad tightness in energy markets, with spillover to non-energy markets. Stretched systems leave physical markets exposed to even small shocks, raising the odds of another shock, and generating persistence in physical asset price inflation. Although broad commodity indices managed to eek out just a small positive return over the last four weeks, it is important to remember that when inventories test their lower bound, volatility tends to rise, while timespreads strengthen. Across the commodity complex, the energy shortage is apparent, with energy curves the most backwardated, followed by a few soft commodities (such as sugar and cotton) and industrial metals such as copper and nickel.
Reinforcing our bullish commodity call. This view on scarcity driving a strengthening in timespreads is the basis for our call of further backwardation across broad commodity indices, generating positive carry for commodity investors in front-month rolling contract positions. We do not believe the underlying supply constraints have eased for spot prices, and view the recent bout of weakness in oil, aluminium and other base metals as a great entry point for strategic long positions, although we expect further volatility ahead. We now forecast 8.3% and 12.8% 12-month total returns for the S&P GSCI and BCOM, respectively. On a tactical basis, we prefer to underweight US natural gas, as the winter risk premium priced seems too extreme in our view: we forecast 12.7% BCOM ex-nat gas returns over 12 months.
