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July 8, 2015

Commodity Watch

The 3Ds of macro push


commodity markets lower
Commodities Research

Deflation, Divergence and Deleveraging reinforce oversupply


Finding new equilibria to balance forward markets
The search for new equilibria in commodity markets has once again
resumed, following a mid-year pause that was beginning to create
complacency that the spring rally had established the new set of equilibria.
We have remained firm that long-term surpluses in most commodity
markets require prices to remain lower for longer to balance both the nearterm physical supply and demand, but more importantly, the longer-term
supply and demand for capital to fund future investments in physical
production capacity, which is more severely imbalanced. Simply put,
commodity markets still have access to far too much capital relative to
future demand and a declining cost structure.

The 3Ds are Deflation, Divergence and Deleveraging


In late May we argued that the spring rally would likely prove transient as
three reinforcing macro trends, a decade in the making, are likely to take
years (not months) to resolve. We refer to these drivers behind our bearish
views as the three Ds: Deflation in costs and commodity prices, following
a decade of investment in commodity productive capacity. Divergence in
growth as the US remains on a divergent growth path relative to the rest of
the world, reinforcing a strong US dollar. Deleveraging in EMs to achieve
a balanced growth environment, following a decade of economic boom
that generated significant macro imbalances and debt, such as in China.

Deleveraging has weakened Chinas CapEx demand


Despite the focus on weakness in the Chinese domestic equity markets, we
view it as a catalyst and continue to believe that underlying demand
weakness, particularly in the commodity-intensive sectors, remains far
more important. Recent data suggest that investments contribution to GDP
growth declined from 50% of growth to 15% in the first quarter, helping to
push CapEx commodities like copper to new lows for 2015.

Jeffrey Currie
(212) 357-6801 jeffrey.currie@gs.com
Goldman, Sachs & Co.

Michael Hinds
(212) 357-7528 michael.hinds@gs.com
Goldman, Sachs & Co.

Damien Courvalin
(212) 902-3307 damien.courvalin@gs.com
Goldman, Sachs & Co.

Max Layton
+44(20)7774-1105 max.layton@gs.com
Goldman Sachs International

Christian Lelong
+61(2)9321-8635 christian.lelong@gs.com
Goldman Sachs Australia Pty Ltd

Abhisek Banerjee
+44(20)7552-9350 abhisek.banerjee@gs.com
Goldman Sachs International

Yubin Fu
+44(20)7552-9350 yubin.fu@gs.com
Goldman Sachs International

Amber Cai
+852-2978-6602 amber.cai@gs.com
Goldman Sachs (Asia) L.L.C.

Caroline Lu
(212) 934-0799 caroline.lu@gs.com
Goldman, Sachs & Co.

Raquel Ohana
+44(20)7552-4055 raquel.ohana@gs.com
Goldman Sachs International

Deflation and divergence reduce the need for capital


Cost deflation reinforced by weaker commodity currencies due to the
divergence in US growth lowers the capital requirement for commodity
markets. However, capital availability is too high, as $60/bbl oil, strong high
yield and equity energy markets have generated an increase in US drilling
last week in already oversupplied markets, which only lower prices will fix.

Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification
and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.

The Goldman Sachs Group, Inc.

Global Investment Research

July 8, 2015

Global

The 3D macro trends deflation, divergence and deleveraging


reinforce oversupply
The search for new equilibria in commodity markets has once again resumed. This follows
a mid-year pause that was beginning to create complacency that the spring rally had
established a set of new equilibria across commodity markets. We have held since last year
that long-term surpluses in many commodity markets will require prices to remain lower
for longer to balance both the near-term physical supply and demand, but more
importantly, the longer-term supply and demand for capital to fund future investments in
physical production capacity. Further, this capital imbalance is far more severe and will
likely take far longer to resolve, particularly in energy. Simply put, these commodity
markets still have access to far too much capital relative to future demand and a declining
cost structure.
If longer-term prices and future price expectations do not decline further to restrict capital
flows soon, the capital will eventually create increasingly larger physical surpluses in the
future that will force physical spot prices below cash costs and towards shut in economics.
Evidence of this dynamic has started to materialize in the past several weeks. Not only did
$60/bbl oil, strong high yield and equity energy markets create an increase in US drilling
last week, but the market structure of the New Oil Order has generated the incentives for
low cost producers such as core-OPEC and Russia to ramp up current and future
production. Acknowledging volatility in the data, the trend in low-cost production is clearly
up. This is all against a backdrop of already oversupplied markets.
The negative feedback loop is significant. The deflationary impulse created by lower
commodity prices reinforces a stronger US dollar, as witnessed by recent moves in FX
markets that resulted in weaker commodity currencies. This decreases the cost of
producing commodities in these countries through lower wage costs that are priced in the
weaker local currencies. Further, this deflationary impulse reinforces a stronger US
economy and higher rates. The higher rates in turn raise the cost of funding for emerging
markets, which reinforces the need for emerging markets such as China to deleverage and
deal with significant macro imbalances developed over the past decade. This ultimately
reduces the demand for commodities, particularly those that are tied to investment such as
copper and iron ore.
In 2015, the shift in the composition of Chinese economic growth away from investment in
productive capacity that is commodity intensive and towards more consumer-driven
economic growth has been significant. Recent Chinese macroeconomic data suggest that
investments contribution to GDP growth declined from 50% of growth to 15% in the first
quarter. This helped to push CapEx commodities like copper to new lows for 2015.
Although spot oil prices still remain above the lows of 2015, long-dated oil prices (a
measure of the normalized oil price), base metal prices, bulk prices and precious metal
prices have all made new 2015 lows in the past week.
While significant uncertainty remains around what long-term price levels will ultimately
generate a new set of equilibria to create stability in both the macroeconomic and microcommodity markets, we do have confidence that they are likely lower than current longdated price levels. In late May we argued that the spring rally would likely prove transient
as these reinforcing macro trends discussed above were decades in the making and will
take years to resolve, not months (see Commodity Watch: The macro reversal will likely
prove temporary May 22, 2015).

Goldman Sachs Global Investment Research

July 8, 2015

Global

Exhibit 1: Deflation after a decade of global productive


capacity investment in commodities

Exhibit 2: Divergence after nearly a decade since the


last interest rate hike in the US

Average age of US capital stock (years)

Real GDP (index, 2008Q4 = 100)


115

12

US

120

11
10

100

80

60

40

Euro zone

110

105

100

20

0
4
1925 1935 1945 1955 1965 1975 1985 1995 2005 2015
Investment phases
Age of capital stock: oil & gas extraction
Real oil price (rhs, 2014 $)

Source: BEA, Goldman Sachs Global Investment Research

95

90
04

05

06

07

08

09

10

11

12

13

14

15

Source: Haver Analytics, Goldman Sachs Global Investment Research


See: FX Views: While you were Greeking June 30 2015

To recap, the three mutually-reinforcing macro drivers behind our bearish views which we
refer to as the three Ds are:
1. Deflation: A decade of investment in commodity productive capacity and new
technologies has created excess capacity in most commodity markets, which will weigh on
both costs and commodity prices, creating a deflationary impulse globally (see Exhibit 1).
2. Divergence: Following nearly a decade since the last interest rate hike in the US and the
USs relatively quick implementation of a QE program, the US is on a divergent growth
path relative to the rest of the world, which reinforces a strengthening US dollar (see
Exhibit 2).
3. Deleveraging: Following a decade of economic boom in emerging markets, significant
macro imbalances were developed. This will require deleveraging debt levels and
rebalancing growth to achieve a balanced growth environment (see Exhibits 3 and 4).
Exhibit 3: Deleveraging after a decade of credit growth
outpacing GDP growth

Exhibit 4: across most EM economies


Credit to GDP gap (current minus trend level)

Credit to GDP gap (current minus trend level)


20

30

ppt

15

Credit-to-GDP growth
greater than trend

10

ppt

25
20

15

10
5

-5

-10

-5

Source: Goldman Sachs Global Investment Research


See: Emerging Markets Weekly: The EM Credit Cycle, Measuring the gap
before crunch time June 25, 2015

Goldman Sachs Global Investment Research

CZK
PEN
HUF
BRL
COP
MYR
ZAR
IDR
TWD
INR
PLN
PHP

2014

2011

2008

2005

2002

1999

1996

1990

1993

DM credit to GDP gap

-10

CNY
CLP
MXN
RUB
ILS
KRW
TRY
THB

EM credit to GDP gap

1987

1984

1981

1978

1975

1972

1969

1966

1963

1960

-15

Source: Goldman Sachs Global Investment Research


See: Emerging Markets Weekly: The EM Credit Cycle, Measuring the gap
before crunch time June 25, 2015

July 8, 2015

Global

As we discussed in May, copper is the one commodity that is the most exposed to these
themes and illustrates the importance of the negative feedback loop. Deflation lowers the
energy and material input cost to producing copper while divergence weakens the Chilean
peso in US dollar terms, which puts downward pressure on local labor costs in Chile. And
then deleveraging in China reduces the demand for copper, all reinforcing the downside
risk in copper prices.
A decade ago, our confidence in the bull case for commodities was driven by the same
three macro themes in reverse short the dollar, long commodities and long emerging
markets. Commodity markets were facing significant underinvestment in productive
capacity with the need to attract capital while the US economy was facing a significant
leverage problem and relatively slower growth that was weighing on the US dollar. At the
same time, emerging markets had a tailwind driven by clean balance sheets. Today these
roles have been reversed.
The EMs look like the US did a decade ago, and commodity markets are facing substantial
overinvestment. Just like these themes reinforced each other in reverse to the upside
during the last decade, today the three Ds are reinforcing each other to find a new set of
equilibrium prices that are likely far lower than current levels. Ultimately rebalancing will
likely be achieved, but it will take years, not months to achieve, which reinforces our
bearish commodity views and our underweight recommendations.

Metals take a leg lower on weak China demand, as Deleveraging


trend continues
While we have been expecting lower prices for CapEx commodities (copper, iron ore) for
some time now, the speed of the recent declines has been unexpected, taking prices
rapidly towards our bearish 12 month forecasts. Furthermore, the metals where we had
been expecting higher prices later in 2015 on diverging supply fundamentals (nickel and
zinc) have also seen similar rapid prices declines over the last few days.
Weakness in the Chinese domestic equity markets has recently become a talking point.
However, we continue to believe that the equity sell off was mostly a catalyst in commodity
markets and that the more far reaching implications are more erosion in the confidence in
Chinese policy makers. For commodity markets, what really matters is underlying demand
weakness that started before the policy generated equity rally, particularly in the
commodity-intensive fixed investment and heavy industry sectors. As such, while recent
metals price action poses significant downside risks to our metals forecasts, it is still
consistent with our bearish macro views, as our Deflation, Divergence and Deleveraging
macro themes continue to play out.
Our suite of indicators continues to paint a downbeat picture for Chinese commodity
demand. Our China Current Activity Indicator (a broad-based alternative measure to GDP)
is tracking growth around 6%, FAI has fallen to 11.4%yoy (down from over 17% a year ago),
apparent steel demand continues to decline, and our GS China copper demand indicator is
also in negative territory.

Goldman Sachs Global Investment Research

July 8, 2015

Global

Exhibit 5: Our economists alternative activity measure


points to even greater weakness in China activity

Exhibit 6: consistent with weak metals demand and


lower prices

GS China Physical Industrial Output index vs. official IP


(%yoy)

S&P GSCI Industrial Metals Spot Index vs. GS China


Physical Industrial Output index

45
40
35
30

GS China "Physical Output"


Growth Indicator

500

60

475

50

China Industrial Production


Growth

450

40

425

25

400

30

20

375

20

15

350

10

10

325

300

275

-5

250
2008

-10
2008

2009

2010

2011

2012

2013

2014

2015

Source: NBS, Goldman Sachs Global Investment Research


See: Asia Economics Analyst: Gauging China Growth, June 22, 2015

0
-10
-20
2009

2010 2011 2012 2013 2014 2015


Metals price index (lhs)
GS China "Physical Output" Growth Indicator

Source: Bloomberg, Goldman Sachs Global Investment Research

Our Asia economics team has also recently published several new alternative measures of
activity in China (see Asia Economics Analyst: Gauging China Growth, June 22, 2015 for
more details). Among these is a Physical Output indicator (see Exhibit 5), which uses raw
quantity measures of output (e.g. kilograms of a good produced), as well as a series of GDP
growth implied from commodity consumption. In both cases our indicator is more volatile
than the official statistic, but most importantly, both have been significantly
underperforming the official statistic over recent months. Among the guts of the data,
weakness in our Physical Output indicator has also been most pronounced in commodityintensive heavy industries, such as Machinery production.

Exhibit 7: Chinese steel and copper demand remains very


weak

Exhibit 8: and Chinese easing has been muted once we


account for domestic equity market moves

% change yoy, 3mma

% yoy growth (lhs), GS China Financial Conditions Index


(>100 = tight conditions, rhs)
15%

0.30
0.25

10%

0.20

11

99

10

100

101

102

103

104

0.15
5%

0.10
0.05

0%

0.00
-0.05

-5%

GS China copper demand indicator

Jan-15

China steel apparent demand (rhs)

Mar-15

Nov-14

Jul-14

Sep-14

May-14

Jan-14

Mar-14

Nov-13

Jul-13

Sep-13

May-13

Jan-13

Mar-13

Nov-12

Jul-12

Sep-12

May-12

Jan-12

Mar-12

Nov-11

Jul-11

Sep-11

May-11

Jan-11

Mar-11

-0.10

105
2011

2012

China Current Activity Indicator

Source: Goldman Sachs Global Investment Research, CEIC.

Goldman Sachs Global Investment Research

2013
GS China FCI inverted (rhs)

2014

2015

GS China FCI excluding equities, inverted (rhs)

Source: Goldman Sachs Global Investment Research, CEIC

July 8, 2015

Global

Finally, regarding Chinese policy easing, the recent improvement in the GS China Financial
Conditions Index (FCI) pointed to an improvement in metals demand over the coming
months. However, the vast bulk of this easing had, up until two weeks ago, been driven by
an improvement in the (domestic) equity market component of the FCI. While the FCI has
historically been strongly correlated with metals prices, domestic equity markets have not
been. Excluding equity markets from the FCI, year-to-date easing has been minimal.
Looking ahead, with credit still growing at double the rate of GDP, it appears that the trend
slowing in metals demand may last for years, highlighting further downside risks to our
metals price forecasts. In particular, copper is heavily exposed to the (late) Chinese
construction cycle, dollar strength and oil price declines, as well as having a strong supply
growth profile over the next 12 months. Yet, we continue to see supply-side differentiation
among metals prices later in 2015 and into 2016. Current nickel prices represent a
buying/hedging opportunity (at c.$11,700/t). On zinc we are modestly bullish from here,
though we are waiting for prices to stabilise, while we expect aluminium prices to remain low.
Exhibit 9: given the lack of historical correlation
between domestic equity and metals prices
China A Shares Index vs. Metals price (S&P GSCI Industrial
Metals) spot index
5400

380

4900
4400
3900
3400
2900

mt (lhs), $/t (rhs)


1.40

7300

1.30

370

1.20

360

1.00

350

0.80

340

0.60

330

0.40

320

0.20

7100

1.10
6900

0.90

6700

0.70

6500

0.50

6300

0.30

6100

0.10

310

2400
1900
Jan 14

Exhibit 10: the reduction in copper net speculative


positioning is more reflective of bearish commodity
demand, not equity moves

300
290
Apr 14

Jul 14 Oct 14 Jan 15 Apr 15


Shanghai Compostie Index
Industrial metals spot prices (rhs)

Jul 15

Source: S&P, Bloomberg, Goldman Sachs Global Investment Research

5900

0.00
-0.10

5700

-0.20
-0.30

5500

-0.40
-0.50
Aug 14

5300
Sep 14

Oct 14

Nov 14

Dec 14

Jan 15

Feb 15 Mar 15

LME and Comex net speculative positioning

Apr 15

May 15

Jun 15

Copper price

Source: LME, Comex, Bloomberg, Goldman Sachs Global Investment Research

Lower oil prices on weak fundamental outlook and continuation of


Deflation and Divergence macro trends, not Greece
Our bearish oil view has been driven by our forecast that after a decade of productive
capacity investment and development of shale technology, the global market remains in
surplus with rising OPEC/low-cost production and resilient US output exceeding resurgent
demand in 2015. Simply put, we do not find that the amount of pressure that the industry
has faced - either through cash flow/oil prices or through access to capital - has been
sufficient to ration the forward surpluses.
While last weeks decline in oil prices coincided with the escalation of the Greek crisis and
weakness in other macro markets, the catalysts for crudes move lower have little to do
with Greece, in our view. Instead, last weeks oil data pointed to a still oversupplied market:
a surge in OPEC production, a rise in the US oil rig count and weakening refining margins.
While we acknowledge the volatility of each of these series, we also view these data points
as the key short-term symptoms of our view that the oil market has yet to rebalance.
On the supply side, June preliminary data pointed to production well above our forecast:
Goldman Sachs Global Investment Research

July 8, 2015

Global

Iraq production reached a record high of 4.30 mb/d, with OPEC surveyed production of
32.10 mb/d and Russia production growth at 150 kb/d yoy. OPEC production at such
levels would come in above our forecast 2015 and 2016 OPEC production growth and
add 1.10 mb/d of inventory build relative to our current forecast for an already 0.60
mb/d global oil market surplus in 2H15.

An agreement with Iran in the coming days could potentially lead to lift of oil sanctions
by year-end. Such a timeline would put at risk our forecast for stable but high oil
inventories in 2016 since we had intentionally and conservatively assumed no increase
in Iranian flows in 2016. The impact of sanctions relief on Irans production could
initially be a drawdown of floating storage of c.30 mb and production increasing by
several thousand barrels per day.

Finally, the US oil rig count rose by 12 last week for the first time since December 5,
2014. This increase in the rig count suggests that at WTI prices near $60/bbl, producers
can ramp up activity given improved returns with costs down nearly 30% and
producers increasingly comfortable at the current cost/revenue/funding mix. We
therefore view the spring rally in prices to $60/bbl as premature and self-defeating as it
will ultimately lead to higher US production.

Exhibit 11: Non-US supply has been growing rapidly


Production in kb/d
26,000

33,000

25,000

32,000

24,000

31,000

23,000

30,000

22,000
Jun-12

Dec-12

Jun-13

Dec-13

Jun-14

Dec-14

Saudi Arabia, Iraq, Russia combined crude oil production

29,000
Jun-15
OPEC (rhs)

Source: Platts, IEA, Bloomberg, Goldman Sachs Global Investment Research.

With production exceeding even our aggressive forecast, oil demand growth is becoming
critical to the oil price outlook in 2H15. But while oil demand has so far this year come in
even above our out-of-consensus bullish forecast, we view this demand strength as partly
weather driven and broadly consistent with the expected response to the large observed
decline in prices. Importantly, we expect this response to remain short-term in duration,
leaving us comfortable with our current oil demand growth forecast of 1.4 mb/d in 2015.

To quantify the expected demand response to the large drop in oil prices over the past
year, in Exhibit 12 we present the impulse response function from a VAR model1,
which estimates the positive impulse to oil demand from a 1% change in prices and 1%
sequential acceleration in activity. Using OECD total products demand, WTI prices and
OECD Industrial Production, these results show that stronger growth translates roughly
1-for-1 into stronger demand, while a much larger (negative) price move is required to

As oil prices, oil demand and growth are all self-reinforcing, a VAR model attempts to control for the interrelated
nature of the data.

Goldman Sachs Global Investment Research

July 8, 2015

Global

move demand as much. In other words, oil demand is relatively inelastic in price, but
relatively elastic to growth. The majority of these effects are also expected within the
first six to nine months.
Exhibit 12: Our VAR analysis shows that demand
responses occur within 9 to12 months

Exhibit 13: and OECD demand appears to have


followed this trajectory over 2014H2 and early 2015

Estimated oil demand response (in %) to +1% shock to prices


or industrial production

Estimated oil demand response (in %) from -45% oil price


shock & +1.3% Industrial Production shock vs. realized
demand
Estimated Response to lower oil price & stronger growth

Industrial Production

0.3

Price (RHS)

0.25

0.8

0.2

0.6

0.15

0.4

0.1

0.2

0.05

-0.05

Source: Goldman Sachs Global Investment Research

Nov 15

Sep 15
Oct 15

Aug 15

Jun 15
Jul 15

May 15

Mar 15
Apr 15

-1

Feb 15

-0.1
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
months after shock

Dec 14
Jan 15

-0.4

+1.3%
IP
Effect

Nov 14

-0.2

45%
Oil
Price
Effect

Sep 14
Oct 14

OECD Demand

Jun 14
Jul 14

Aug 14

1.2

Source: IEA, Goldman Sachs Global Investment Research

In Exhibit 13, we use these results to approximate the demand response to the lower
prices and stronger growth seen over 2014H2. This exercise suggests that that it takes
nine months to translate a one-time 45% oil price shock and a 1.3% shock to Industrial
Production into incremental demand. This is important as it suggests that stronger
demand now requires another large fall in prices or persistently strong economic
growth. Importantly, neither our bearish oil price forecasts nor our economists
economic growth forecasts are large enough to absorb oil production growth at its
current level in 2H15.

Finally, while this analysis only looks at OECD oil demand, there has been increased
market focus recently on a large and growing miscellaneous to balance oil demand.
This is oil disappearance in excess of identified demand (supply minus OECD demand,
non-OECD demand and changes in inventories). Our analysis shows that historically
this miscellaneous series has been price sensitive and likely driven by tertiary
inventory builds (Exhibit 14). However, if this recent increase had been caused by
demand, refining margins would now be higher (not lower) as we near the peak in
refinery runs. Instead, Singapore complex refining margins have declined sharply over
the past weeks, with European refining margins holding up well only because of the
weakness in Brent prices (Exhibit 15).

Net, we forecast the global oil market surplus will materialize in a product surplus this fall,
pushing refining margins lower with higher OPEC production further overwhelming even
stronger demand growth (see European diesel needs to cool its engines, June 3, 2015). As
a result, we reiterate our fundamentally driven forecast for lower oil prices into this fall (see
Reality of oil market will trump perception and positioning, May 25, 2015).

Goldman Sachs Global Investment Research

July 8, 2015

Global

Exhibit 14: Miscellaneous to balance historically price


sensitive and mean reverting

Exhibit 15: Weaker refining margins also suggest its not


all demand

IEA Miscellaneous to balance (kb/d) vs. Brent price changes


(QoQ, %, rhs)

Refining margins in $/bbl

3000

-60%

2000

-40%

12

1000

-20%

10

0%

14

8
6

-1000

20%

-2000

40%

-3000

60%

1Q1986
2Q1987
3Q1988
4Q1989
1Q1991
2Q1992
3Q1993
4Q1994
1Q1996
2Q1997
3Q1998
4Q1999
1Q2001
2Q2002
3Q2003
4Q2004
1Q2006
2Q2007
3Q2008
4Q2009
1Q2011
2Q2012
3Q2013
4Q2014

Miscellaneous to balance

QoQ Brent price change (%, rhs, inverted)

Source: IEA, ICE, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research

0
Jan

Feb
2010

Mar

Apr
2011

May

Jun
2012

Jul

Aug
2013

Sep

Oct

Nov

2014

Dec
2015

Source: Platts, IEA, Goldman Sachs Global Investment Research.

July 8, 2015

Global

Commodities in a nutshell
Energy
Crude Oil: We maintain our bearish views
Fundamentals: Crude oil prices have declined sharply over the past week on growing
evidence that the market is still oversupplied. Specifically, June preliminary production
data came in well above our forecast with a surge in OPEC production, in particular Iraq.
Further, the first rise in the US oil rig count since December suggests that producers can

120
110
100
90
80
70

ramp up activity given improved returns at $60/bbl WTI with costs down nearly 30%. With

60

production exceeding even our aggressive forecast, oil demand growth is becoming

50

critical to the oil price outlook in 2H15. While oil demand has so far this year come in even
above our out-of-consensus bullish forecast, we view some of this demand strength as (1)
weather related, (2) front-loaded, and (3) concurrent with non-observable stock builds. In
particular, our modeling suggests that most of the positive demand impulse from lower oil
prices has now passed through. Further, had the miscellaneous to balance been real
demand, refining margins would be higher, not weaker, as observed this past week since

40
30
Jan 14
120
110

Jan 15

Jan 16

Brent Crude
$/bbl

Jan 17
Spot Price
Curve
3m Forecast
12m Forecast

100
90
80
70

we are nearing the peak in runs. Net, we continue to forecast the global oil market surplus

60

will materialize in a product surplus this fall, pushing crude oil prices and refining margins

50

lower with higher OPEC production further overwhelming even stronger demand growth

40

than we forecast. As a result, while developments in Greece after this Sundays surprise

Spot Price
Curve
3m Forecast
12m Forecast

WTI Crude
$/bbl

30
Jan 14

Jan 15

Jan 16

Jan 17

referendum result could exacerbate oil price volatility in the short-term, we reiterate our

Source: NYMEX, ICE, Goldman Sachs

fundamentally driven forecast for lower oil prices into this fall.

Global Investment Research

Price Outlook: Oil rebalancing remains in its early stages with the current cash flow and
funding mix stalling it. As a result we believe that as fundamentals reassert themselves
and we move past the seasonal peak in demand, oil prices will continue to sequentially
decline with our October price WTI forecast at $45/bbl. We keep our Brent-WTI spread
unchanged at $6/bbl at 3 and 6 months and at $5/bbl at 12 months.
Timespread Outlook: Evidence of a growing market surplus should weigh on
timespreads going forward

RBOB Gasoline: Demand driving US market


Fundamentals: Stocks have been drawing with demand growing at 3% on average.
However, imports have picked up with the arbitrage open from Europe. The strong RBOB

3.5

Spot Price
Curve
3m Forecast
12m Forecast

$/gal

3.0

heating oil spread is also incentivising refiners to maximize their gasoline yields at the
expense of distillate, though the scope is limited given that this incentive has persisted for
a while, limiting incremental switching. From mid-August to September we get into

2.5

2.0

hurricane season, which can see a lot of volatility in RBOB. Thereafter, we start the next
season of maintenance. In particular, Irving St John will be shutting their 70 kb/d FCC a
gasoline making unit - and one of its crude distillation units from midSeptember. This
will reduce imports into New York Harbor supporting RBOB. The end of the year should
see builds in gasoline inventories as demand drops seasonally and supply rises from

1.5

1.0
Jan 14

Jan 15

Jan 16

Jan 17

Source: NYMEX, Goldman Sachs Global


Investment Research

refineries returning from maintenance.


Price Outlook: We expect RBOB to remain supported and volatile in the coming months
due to strong demand and hurricane risk followed by the fall turnaround season.
Counterbalancing these factors is European resupply and yield shift by the domestic
refining system albeit with limited scope. Weakness will set in after refineries return from

Goldman Sachs Global Investment Research

10

July 8, 2015

Global

maintenance and demand declines seasonally.


Timespread Outlook: We expect spreads to remain supported in the near term with
softness setting in at the end of the year. We have our 3, 6 and 12-month spreads forecast
at -3%, 0.4% and flat, respectively. The change at the front reflects a roll of the contract
from summer to winter gasoline as well as a roll our forecast for crude.

NYMEX Heating Oil: Expecting inventory builds


Fundamentals: US distillate stocks have been building early this year and are now just at
the 5-year seasonal average. This is 14 mb higher than this time last year and 11 mb above

3.5

Spot Price
Curve
3m Forecast
12m Forecast

$/gal

3.0

the prior two years. PADD 1 (US East Coast) distillate stocks were at 5-year lows in March
and have since built rapidly and are now 7 mb higher than this time last year. We believe
that US distillate will continue to be weighed down by strong production, though there will

2.5

2.0

be some seasonal support during the fall refinery maintenance period and the winter. The
risk to the upside is if the arbitrage to Europe which is currently slightly open at the front
continues to remain open and exports increase. However, we view this risk to be limited
given our bearish view of European distillate.
Price Outlook: We expect heating oil to continue to be soft as inventories are at healthy

1.5

1.0
Jan 14

Jan 15

Jan 16

Jan 17

Source: NYMEX, Goldman Sachs Global


Investment Research

levels. There will be some support as we get into the maintenance period in the fall and
then into the heating season. The changes reflect the rolling of the contract.
Timespread Outlook: Spreads have softened commensurately with inventory builds. We
expect heating oil spreads to remain subdued.

NYMEX Nat. Gas: Modest uptick in price volatility on mixed fundamentals


Fundamentals: The US natural gas market experienced competing fundamental triggers
during the last month. US dry production recently started to recover from maintenancerelated weaknesses shown in May and June, driven by a rebound in gas output out of the
Marcellus and Utica shale plays. We expect this trend to continue in the near future, led by
the recent start-up of Transcos Leidy Southeast Expansion and the expected completion of
the Rockies Express Pipeline East-to-West project in early August. Despite a recent modest
uptick, industrial demand has been showing signs of weakness, being down by 0.3 Bcf/d
yoy in June. On the other hand, power burn spiked last month on a wave of coal
retirements which started taking place on May 31st, in addition to warmer-than-normal
weather, which also contributed to boosting cooling demand. Similarly, net exports to
Mexico rose to an all-time high as a result of their increasing gas consumption for power

6.0

$/mmBtu

Spot Price
Curve
3m Forecast
12m Forecast

5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
Jan 14

Jan 15

Jan 16

Jan 17

Source: NYMEX, Goldman Sachs Global


Investment Research

generation and falling production. Net, the market surplus continues to require PRB coal to
gas substitution.
Price Outlook: We continue to forecast US gas prices of $3.25/mmBtu in 2H15 as
normalizing summer demand should help rein in current oversupply. On the back of our
view that continued productivity gains seen in shale oil will yield equal cost reduction on
the gas side, we maintain our 2016 price forecast to $3.50/mmBtu. Our forecast remains
above the forward curve as we are constructive on the potential for demand growth in
2016.
Timespread Outlook: Natural gas stocks have been building by c.16 Bcf faster-thannormal since the start of the injection season, boosting inventories at a surplus to 5-year
average levels. Should this continue, timespreads would likely depress in the next six
months.

Goldman Sachs Global Investment Research

11

July 8, 2015

Global

UK NBP Nat. Gas: Despite currently tight fundamentals, we still expect prices to fall
through 2015-16
Fundamentals: Despite the latest announcement of Dutch production cuts at Groningen
(to 30 Bcm/y, 6 Bcm below our previous estimate) which have yet again tightened the 2015

75.0

p/therm

Spot Price
Curve
3m Forecast
12m Forecast

70.0
65.0

outlook for northwest European gas markets, we maintain our bearish UK NBP into 2016

60.0

on a softer fundamental outlook driven by significant oversupply in LNG markets and

55.0

subsequently higher imports into European markets.

50.0
45.0

Price Outlook: UK NBP has rallied 5% over the past month, with low storage volumes

40.0

and the announcements of more cuts at Groningen driving demand for Russian imports.

35.0

As Brent has traded lower than we forecast in back in March, we now expect oil-indexed

30.0
Jan 14

Jan 15

Jan 16

Jan 17

Russian gas prices will remain steady through 2015 rather than falling further. Accordingly,
we now forecast NBP to stay at 42 p/th through 2H15. Current tight fundamentals only
provide limited upside risk as (i) our forecast for 2015 is close to the oil-indexed `ceiling

Source: ICE, Goldman Sachs Global


Investment Research

price, (ii) should prices rise, the UK coal-to-gas switching demand we forecast for 3Q15
would fall accordingly. Based on our oil teams latest forecast profile, we modestly lower
our 2016 NBP forecast by 5% to 38 p/th. We continue to expect that surplus LNG cargoes
will find their way to Europe in 2016 as a large wave of supply comes to market, keeping
prices low.
Timespread Outlook: As the global LNG market becomes increasingly oversupplied over
the course of the next 18 months, a softer European gas balance will likely be consistent
with weakening timespreads.

Industrial Metals
Copper: China construction cycle, crude, and currency outlook = sell
Fundamentals: Visible copper inventories (LME, SHFE, Comex and bonded) have

8,000

continued to fall slightly over the past month, in line with seasonal draws which tend to

7,500

occur each year between April and September. However, year on year growth in visible

7,000

inventories is clear cut, with stocks rising c.420kt yoy (including our assumptions of SRB

6,500

purchases) and c.200kt yoy (excluding them). Net speculative positioning on the LME and

6,000

Comex has fallen very sharply over the past month, though it remains above the January

5,500

lows.

5,000

Price Outlook: We believe that current prices represent a selling opportunity for

4,500
Jan 14

producers and investors alike. Chinas new normal of weakening commodity demand

Source: LME, Goldman Sachs Global

growth, forecast sustained weakness in late-cycle China construction completions (owing

Investment Research

Spot Price
Curve
3m Forecast
12m Forecast

$/mt

Jan 15

Jan 16

Jan 17

to the property inventory build-up N.B. China steel demand declines over the past six
months are the canary in the copper market), lower oil prices (shale), a stronger dollar,
and above-trend supply growth. The recent modest easing in Chinese financial conditions
and pick up in property sales will not result in a strong enough pickup in demand to offset
the strong acceleration in mine supply growth we expect over the coming 6-12 months.
Timespread Outlook: LME spreads remained soft over the past month. This has not
been associated with a rise in LME stocks, and as such we believe this reflects the
weakness in the physical market evidenced by low or falling physical premiums. The nearterm copper spread outlook continues to be complicated by the combination of physical
weakness and expected seasonal inventory draws.

Goldman Sachs Global Investment Research

12

July 8, 2015

Global

Nickel: After a very weak past 12 months, the outlook is improving


Fundamentals: LME nickel inventories have fallen by over 10,000t over the past month. LME

24,000

net speculative positioning remains around the lowest levels since LME data began in July

22,000

2014. The wide open SHFE to LME import arbitrage which was present last month has for the

20,000

most part closed on the back of a sharp decline in SHFE prices (-7% since the start of June vs

18,000

LME flat), following a sharp increase in Chinese refined and ferronickel imports in May.

16,000

Price Outlook: From current price levels of c.$11,600/t, nickel is our preferred metal long
exposure, with a bullish outlook for both supply (rising costs of nickel pig iron production

$/mt

Spot Price
Curve
3m Forecast
12m Forecast

14,000
12,000

should restrict output growth) and demand (nickel is relatively heavily exposed to the

10,000
Jan 14

consumer recovery in the US and Europe, and to Chinas eventual shift to a consumer-

Source: LME, Goldman Sachs Global


Investment Research

driven economy). Nickel is also heavily exposed to a sustained pick up in China property

Jan 15

Jan 16

Jan 17

sales. Please see: Metal Detector Nickel market outlook: our preferred metal from
c.$11,600/t, published July 6, 2015, for details
Timespread Outlook: Nickel timespreads are in steep contango, reflecting the high level
of LME inventory. This is not expected to change in the near term.

Aluminium: Prices set to remain low until we see output cuts


Fundamentals: Global aluminium output growth accelerated sharply in April and May,

2,200

rising to 10% yoy growth (relative to trend of 6%), driven by an acceleration in low cost

2,100

Chinese supply growth. Set against sluggish global demand growth, the aluminium market

2,000

balance is in clear surplus. At the same time, costs of production have been in a

1,900

downtrend, on the back of lower energy prices and we estimate the 90%ile of ex-China

1,800

output costs is c.$1,875/t, vs current all in prices of $1,867/t (average US Midwest

1,700

transaction price and European duty paid all in price). Net speculative positioning on

1,600

aluminium is at its lowest levels since the LME data began in July 2014.
Price Outlook:. We believe that prices need to remain low in order to restrict output
growth, and it is difficult to see where sufficient cuts will come from given the burden will

Spot Price
Curve
3m Forecast
12m Forecast

$/mt

1,500
Jan 14

Jan 15

Jan 16

Jan 17

Source: LME, Goldman Sachs Global


Investment Research

likely fall on ex-China producers rather than high Chinese producers. Having said this,
following the recent sell-off, we do not see a lot of further downside to all-in pricing from
current levels, with current prices likely sufficient to see a response, over time. We see
prices recovering somewhat in 2016 as low prices are the cure for low prices, and as
Chinese demand growth improves.
Timespread Outlook: LME aluminium spreads have softened significantly over the past
month. We expect them to remain soft in the near term.

Zinc: A strong bull narrativestill waiting as demand weak, net speculative positioning
stubbornly solid
Fundamentals: Zinc-intensive China infrastructure growth FAI slowed in 2Q15, as did

3,000

Chinese automotive output. We see both reaccelerating in the 2H15, supporting zinc

2,800

pricing. Two major mines are ramping down/closing over the next six months Century

2,600

and Lisheen. After recently reaching its highest level since mid-2014 last month, zinc net

$/mt

Spot Price
Curve
3m Forecast
12m Forecast

2,400

speculative length halved over the past month.


2,200

Price Outlook: After forecasting a continued pullback in prices over the past month, we

2,000

think zinc prices may continue to remain weak in the very near term. Having said this, we
believe that sub-$2,000/t zinc presents a solid buying/consumer hedging opportunity. This

1,800
Jan 14

is because we are bullish on the outlook for zinc beyond over the next 6-12 months,

Source: LME, Goldman Sachs Global

particularly relative to other metals, such as copper. The relative bull case for zinc has

Investment Research

Jan 15

Jan 16

Jan 17

three drivers: a) zincs high exposure to China infrastructure and automotive sectors, b) its
Goldman Sachs Global Investment Research

13

July 8, 2015

Global

relative lack of exposure to dollar strength (marginal output costs are in China), and c) the
closures of the Century and Lisheen zinc mines.
Timespread Outlook: LME zinc spreads remained loose over the past month. LME zinc
spreads may tighten somewhat over the next 6-12 months should the market tighten.

Lead: Set to continue to trade alongside zinc


Fundamentals: Alongside zinc, lead prices have moved sharply higher in recent weeks,

2,700

after reaching their lowest levels since 2010. The China lead import arbitrage is closed, and

2,500

lead supply and demand fundamentals in our view remain weak.

2,300

Price Outlook: We continue to forecast lead at 2,200 in 12 months

2,100

Spot Price
Curve
3m Forecast
12m Forecast

$/mt

1,900
1,700
1,500
Jan 14

Jan 15

Jan 16

Jan 17

Source: LME, Goldman Sachs Global

Investment Research

Precious Metals
COMEX Gold: Maintaining our bearish view
Fundamentals: We continue to expect continued strengthening of the dollar and gradual
increase in US real rates (as growth recovery resumes after a disappointing Q1 and we
move closer to the first FED rate hikes) to push gold prices further down.

1,400

Spot Price
Curve
3m Forecast
12m Forecast

$/toz

1,350
1,300
1,250

Price Outlook: Gold prices remained in a relatively tight range in June and early July,

1,200

with concerns over Grexit, a weakening of the US dollar against the euro, and rising US

1,150

real rates having little overall impact on pricing. Our gold price forecasts remain $1,180/oz

1,100

in 3 months, $1,150/oz in 6 months and $1,050/oz in 12 months.

1,050

Timespread Outlook: We expect the current 1-2 month and 1-12 month timespreads to
remain broadly unchanged until later in the hiking cycle.

1,000
Jan 14

Jan 15

Jan 16

Jan 17

Source: COMEX, Goldman Sachs Global


Investment Research

COMEX Silver: Downside risks as interest rates normalize


Fundamentals: Over the long run, silver prices tend to track gold prices. Accordingly, our
forecasts for interest rate hikes to kick off in 2015, continues to point to lower precious

24.0

21.0

has seen the silver to gold price ratio fall as silver demand weakens.

20.0

Price Outlook: We expect the silver/gold price ratio to normalize as global growth begins

18.0

the bearish factors to dominate and silver prices to fall over the next 12 months.

Spot Price
Curve
3m Forecast
12m Forecast

22.0

metals prices. At the same time, the downturn in global economic activity since mid-2014

to recover later this year and accelerates further over 2016/17. However, on net, we expect

$/toz

23.0

19.0

17.0
16.0
15.0
14.0
Jan 14

Jan 15

Jan 16

Jan 17

Source: COMEX, Goldman Sachs Global


Investment Research

Goldman Sachs Global Investment Research

14

July 8, 2015

Global

COMEX Platinum: Prices into the cost-curve as producers fail to respond


Fundamentals: The platinum price is trading near its six-year lows, in our view reflecting

1,600

a structural fundamental surplus, rather than a temporary above-ground de-stocking

1,500

process. We believe this price weakness reflects disappointing demand and a ramping-up

1,400

of supply, not inventory liquidation, confirmed by the significant underperformance of

1,300

platinum despite strong ZAR and gold. With significant low-cost supply due online over

1,200

the next 2-4 years, and with gold prices expected to come under pressure, we believe that

1,100

the platinum price will remain under the marginal cost of production, which we see at

1,000

US$1,050-1,150/oz, in order to incentivise closures.


Price Outlook: Over the next 12 months we expect platinum to average c. $1,175/oz;
however if autos data disappoint or supply was to surprise to the upside there would be

$/toz

900
Jan 14

Spot Price
Curve
3m Forecast
12m Forecast

Jan 15

Jan 16

Jan 17

Source: COMEX, Goldman Sachs Global


Investment Research

downside risk to our forecast.

COMEX Palladium: Major selloff on China demand weakness


Fundamentals: Palladium prices have underperformed on disappointing auto sales numbers
from China and media reports of increased supply from both primary and secondary sources.
Net speculative positioning has declined sharply over the past month, and more broadly, over
the past 6 months, in line with the deterioration in Chinese growth over that period.

1,000

$/toz

Spot Price
Curve
3m Forecast
12m Forecast

950
900
850
800

The fundamentals of palladium remain attractive in our view given we expect a

750

reacceleration in automotive output in China and have a positive outlook for gasoline

700

output growth in other markets. In addition, the fall in oil prices spurs larger engine size

650

car sales which have higher metal loadings. On primary supply we see little scope for

600
Jan 14

Jan 15

Jan 16

Jan 17

surprise. Regarding secondary supply there have been media reports that 30% of supply is
expected to come from secondary sources. On our estimates secondary supply is expected
to account for 30% of total supply yet we see the metal in a sustained deficit.

Source: COMEX, Goldman Sachs Global


Investment Research

Price Outlook: Over the next 12 months we expect the palladium price to rise to $863/oz.

Agriculture
CBOT Corn: Weather adds uncertainty to acreage and yields, but bearish outlook
remains unchanged
Fundamentals: A bullish USDA June corn stock report (June 1 stocks 108 mil bu below

5.50

the consensus estimate) and 15/16 corn planted acreage below expectations saw prices

5.00

rise above $4 last week. While crop conditions remain favorable for now, there has been

4.50

some sequential deterioration over the last few week and risks to yields from overly wet

Spot Price
Curve
3m Forecast
12m Forecast

$/bu

4.00

weather, particularly in the Eastern Corn Belt, remain in place for now.
3.50

Price Outlook: Despite the recent stock adjustments we continue to see robust 2015/16

3.00

total supply (as 14/15 carry-out still remains high globally). This keeps our forecasts
anchored below $4 in the absence of a further deterioration in weather. With most of the

2.50
Jan 14

Jan 15

Jan 16

Jan 17

key growing period still ahead, and with El Nio conditions introducing greater weather

Source: CBOT, Goldman Sachs Global

uncertainty, pricing remains sensitive to weather forecasts over the coming weeks.

Investment Research

However, recent weather forecasts have been indicating cooler temperatures (which would
be supportive of yields) for most of the key US states.
Timespread Outlook: We continue to expect high global carry-out stocks and hence
continue to see negative roll yields persisting.

Goldman Sachs Global Investment Research

15

July 8, 2015

Global

CBOT Soybean: Planting delays in the US, but we continue to see robust 2015/16
production
Fundamentals: US planting progress got off to a fast start in May, but subsequent wet
weather saw progress fall below the 5Y average. Prices rallied last week above $10/bu as

16.0

13.0

estimate). While planted acreage estimates were revised upwards in the same report

12.0

(85.1mil acres, 0.5 mil acres above March planting intentions), this number may end up

11.0

optimistic as wet conditions may lead to high soybean prevent planting. Just as for corn,

10.0

as temperatures look set to cool in key growing states.


Price Outlook: Record 14/15 production from South America still points to elevated
global carry-in for 15/16, despite the recent US stock estimate revision. Global acreage is

Spot Price
Curve
3m Forecast
12m Forecast

14.0

the June USDA report put June 1 stocks at 625 mil bu (45 mil bu below the consensus

key growing conditions lie ahead but recent forecasts for US weather have been favorable

$/bu

15.0

9.0
8.0
7.0
Jan 14

Jan 15

Jan 16

Jan 17

Source: CBOT, Goldman Sachs Global


Investment Research

also very likely to be higher than last year, helping to keep production elevated globally.
Accordingly, we remain bearish for 15/16.
Timespread Outlook: Large global 14/15 carry-out stocks points to inventories remaining
elevated for some time. We continue to see timespreads weaker than current market
pricing.

CBOT Wheat: El Nio continues to pose weather risks


Fundamentals: The USDAs June stock report saw higher than expected wheat stocks
(753 mil bu on June 1, 35 mil bu above the consensus estimate) and a larger planted area

8.0

$/bu

Spot Price
Curve
3m Forecast
12m Forecast

7.5
7.0

(56.1 mil acres, 0.2 mil above consensus). However, wheat prices followed corn and

6.5

soybeans higher. Weather remains a key concern and, while lower precipitation in

6.0
5.5

Australia has not yet posed a major risk to yields (thanks to cool temperatures), the Indian

5.0

monsoon has been in rainfall deficit.

4.5
4.0

Price Outlook: For now we maintain our forecasts at 530c/bu in 3, 6 and 12 months.
Careful monitoring of global weather conditions will be required as the current El Nio
episode progresses.

3.5
3.0
Jan 14

Jan 15

Jan 16

Jan 17

Source: CBOT, Goldman Sachs Global


Investment Research

Timespread Outlook: Large 2014/15 carry-out stocks and robust production estimates for
2015/16 points to large inventories for longer. However, adverse weather on the back of El
Nio could see these stocks drawn more rapidly than expected.

NYBOT Cotton: Prices unchanged as supply weakness and uncertainty is matched by


demand
Fundamentals: Planting in the US lagged the 5Y average for almost the entire period, but
unlike corn & soybean prices, cotton has not been rallying on the back of this weak

100

Spot Price
Curve
3m Forecast
12m Forecast

c/lb

95
90

planting data keeping planting incentives skewed towards other crops. Non-US supply is

85

also likely to decline as China acreage estimates are at their lowest level since 1949, and

80
75

India (now the number one producer globally) faces significant weather risks from El Nio

70

and a rainfall deficit monsoon.

65
60

Price Outlook: The lack of market reaction to the current supply situation is likely due to:

55

(1) Uncertainty over the pace of global growth and; (2) Chinas cotton policy shift, which

50
Jan 14

Jan 15

Jan 16

Jan 17

will substantially reduce import demand. For now we maintain our forecasts at 60c/lb over

Source: NYBOT, Goldman Sachs Global

3, 6 and 12-month horizons, assuming broadly normal weather and a recovery in US and

Investment Research

global growth in line with our economists estimates.


Timespread Outlook: Timespreads and roll yields are likely to remain relatively weak
until more progress is made in reducing global stockpiles.

Goldman Sachs Global Investment Research

16

July 8, 2015

Global

NYBOT Coffee: Weather uncertainties (past and future) remain key


Fundamentals: Coffee continues to trade sideways in a 120c 140c/lb range. The key
uncertainty remains the Brazil harvest as CONAB production estimates (44.3m bags)
diverge substantially from USDA estimates (52.4m bags). In our view, this ultimately
reflects the still uncertain impact of drought in 2014.

260

Spot Price
Curve
3m Forecast
12m Forecast

c/lb

240
220
200
180

Price Outlook: While the next few months will show the outcome of last years weather,

160

adverse weather on the back of El Nio (which is forecast to persist for the remainder of

140

2015) remains a risk for this year and next. For now we maintain our forecasts at 150c/lb

120

over 3, 6 and 12 months.

100
Jan 14

Jan 15

Jan 16

Jan 17

Source: NYBOT, Goldman Sachs Global


Investment Research

NYBOT Cocoa: Supply concerns remain key, but demand may now be reaching a turning
point
Fundamentals: Cocoa prices rallied by more than 20% over Q2 as production estimates
for Ghana have been revised substantially lower over the last few months, offsetting

3,500

Spot Price
Curve
3m Forecast
12m Forecast

$/mt

3,400
3,300

upward revisions to Ivory Coast, Cameroon and Ecuador. Strong Harmattan winds earlier

3,200

in the year and reduced fertilizer application (GHS has depreciated by 36%ytd) were the

3,100
3,000

key drivers behind the downgrade. Current El Nio conditions also point to continued

2,900

downside risks to global production this year and next.

2,800
2,700

Price Outlook: While prices are now far above our $3,000/mt forecasts, and supply risks

2,600

are likely still skewed to the downside owing to El Nio conditions, we remain cautious on

2,500
Jan 14

prices. Weaker GDP growth saw Q1 grindings slow (particularly in Asia, -9.3%yoy). With

Source: NYBOT, Goldman Sachs Global

prices now up over 12%ytd, further demand destruction may be seen over the coming

Investment Research

Jan 15

Jan 16

Jan 17

months.

NYBOT Sugar: Prices near seven year lows, but El Nio still poses upside risks
Fundamentals: Harvest estimates for Brazil have been pointing to robust 2015/16
production, thanks to more supportive weather conditions in 2015Q1. While recent data

20

c/lb

Spot Price
Curve
3m Forecast
12m Forecast

19
18

released by Unica has shown greater ethanol production and lower sugar production by

17

Centre South Brazilian sugar mills (driven by price differentials), the cumulative 17% BRL

16
15

depreciation year to date, and reintroduction of export subsidies in India is likely to keep

14

the sugar market well supplied for some time, provided weather conditions remain

13

normal.

12

Price outlook: El Nio continues to pose the most significant downside risks to

10
Jan 14

11
Jan 15

Jan 16

Jan 17

production. While the Indian monsoon began with relatively high intensity, forecasts are

Source: NYBOT, Goldman Sachs Global

now pointing towards an eventual deficit. For now we maintain our forecasts at 13.0 flat

Investment Research

over a 3, 6 and 12-month horizon.

Goldman Sachs Global Investment Research

17

July 8, 2015

Global

Livestock
CME Live Cattle: Herd rebuilding and weak demand keep prices rangebound
Fundamentals: After peaking at just over 170c/lb in late 2014 cattle prices have remained

180

in a 145-155c/lb range since February. The latest USDA survey was in line with analyst

170

forecasts and continued to show feedlot placements down significantly year-on-year. This

160

weakness in placements is largely reflective of a combination of herd re-building through

c/lb

Spot Price
Curve
3m Forecast
12m Forecast

150

heifer retention and limited feeder cattle supplies. Slaughter is also significantly down
year-on-year consistent with higher dressed weights, as cattle remain on feed for longer.

140
130

Price Outlook: Given the competition from alternative meat supplies, such as pork, we
continue to see prices declining moderately over the next 12 months and maintain our
forecasts at 150, 145 and 140c/lb on a 3-, 6- and 12-month horizon, respectively.

120
Jan 14

Jan 15

Jan 16

Jan 17

Source: CME, Goldman Sachs Global


Investment Research

CME Lean Hog: Herd recovery and US$ strength to keep downward pressure on prices
Fundamentals: After reaching a 85c/lb peak in May prices have moderated, counterseasonally, to just below 80c/lb. The recent Quarterly Hogs and Pigs Report showed a

140

110

litter have recovered to 10.4, a record level.

100

First, there could still be more in the post-PEDv recovery, albeit this is likely now mostly

90
80
70
60

played out. Second, our FX strategists foresee additional dollar strength, which would

50

continue to weigh on exports. We roll our forecasts to 70, 70 and 75c/lb in 3, 6 and 12

40
Jan 14

months, from 80, 70 and 70 c/lb.

Spot Price
Curve
3m Forecast
12m Forecast

120

strong post-PEDv recovery: inventories are up +9%yoy (to 66.9 million head) and pigs per

Price Outlook: We maintain a moderately bearish outlook on prices for two key reasons:

c/lb

130

Jan 15

Jan 16

Jan 17

Source: CME, Goldman Sachs Global


Investment Research

Bulks
Iron Ore: Rally living on borrowed time
(62% fines CFR China)
Fundamentals: On the supply side, we expect the weaker than expected exports from
Brazil and Australia during April and May to normalize in the coming months. Past supply
underperformance appears to be caused by temporary factors such as weather disruption,
and the recent increase in freight activity at major export terminals, together with rising
freight rates, should result in a recovery in Chinese inventories and continued pressure on
spot prices. Meanwhile, mines that had been previously flagged for closure in Australia
and Sierra Leone are now due to restart operations. On the demand side, steel mill
margins have declined to a 5-year low as prices for steel and iron ore have diverged,
creating downside risks to demand.
Recent Market Activity: Spot prices declined for nine consecutive days to $49.75/t CFR
China amid broad sell-off of China equities and commodities. Fundamentally, we see
increased freight activity at major iron ore terminals and a halt of port inventory drops last
week.
Price Outlook: At this level, prices are below to our US$60/t estimate of all-in marginal
production costs, but we see limited upside as low prices are required to trigger adequate

Goldman Sachs Global Investment Research

18

July 8, 2015

Global

amount of closures in the resumed oversupplied environment. We expect prices to decline


over our forecast period down to US$44/t in next year and US$40/t in 2017.
Timespread Outlook: The forward curve should remain in backwardation given ongoing
hedging by producers and the combined impact of cost deflation and structural
oversupply. Inventory levels in China are low and declining due to weak exports, but
stocks should normalize in the coming months as we expect the disruptions to be
temporary.

Metallurgical Coal: Finding price support after two years of cuts


(Premium HCC, FOB Queensland)
Fundamentals: After two years of mine closures, total supply cuts are equivalent to 10%
of seaborne supply. Given the ramp up of new mines in Australia and Mozambique, further
production cuts are likely and the lower cost miners shall continue to displace higher cost
ones. On the demand side, we don't expect seaborne demand to grow further during our
forecast period to 2019, and China will inch closer to self-sufficiency in the medium term
but it is unlikely to become a net exporter. The imports by China in May was weaker than
many expected with only 1.88 Mt of coking coal imported, down 68% yoy.
Recent Market Activity: Prices improved 7% from their recent lows in May and was
relatively stable in the recent sell-off of commodities, currently at $87.75/t FOB
Queensland, still below the marginal cost. The 3Q benchmark price was concluded in
Japan at $93/mt FOB Australia, a $16/t qoq drop from the previous benchmark.
Price Outlook: Prices improved 9% from their recent lows, currently at $89/t FOB
Queensland, but its still below the marginal cost. The 3Q benchmark price was concluded
in Japan at $93/mt FOB Australia, a $16/t qoq drop from the previous benchmark. We
believe prices may have bottomed. However, any price upside is likely to be limited amid
muted demand and new projects in Australia and Mozambique ramping up.
Timespread Outlook: With prices trading below marginal cost, an eventual recovery is
likely but the timeframe for a sustained increase in prices is subject to a recovery in the
Chinese domestic market.

Thermal Coal: short term support from supply disruptions


(6,000kcal/kg NAR, FOB Newcastle)
Fundamentals: Low prices have caused a steep decline in Indonesian exports but the
market remains well supplied because these production cuts are offset by weaker Chinese
demand. Although Chinas role as the buyer of last resort may not continue indefinitely,
Chinese domestic coal prices remain the key anchor point for seaborne coal. Indian
demand remains strong but any price upside is limited by persistent overcapacity in China
and a dwindling number of growth markets in other regions.
Price Outlook: We believe prices have limited upside to US$65/t, provided that the
Chinese coal industry consolidates and domestic prices normalise.
Timespread Outlook: In a similar vein to metallurgical coal, the eventual recovery in
thermal coal prices is subject to the consolidation of the Chinese coal sector; excess
capacity must close in order for domestic prices to recover and provide some headroom
for seaborne prices.

Goldman Sachs Global Investment Research

19

July 8, 2015

Global

Price actions, volatilities and forecasts


Prices and monthly
changes1

Volatilities (%) and monthly changes2

Historical Prices

Price Forecasts3

units

06 Jul Change Implied2 Change Realized2 Change 1Q 14 2Q 14 3Q 14 4Q 14 1Q 15 2Q 15

WTI Crude Oil

$/bbl

52.53

Brent Crude Oil

$/bbl

56.54

RBOB Gasoline

$/gal

1.92

NYMEX Heating Oil

$/gal

1.71

NYMEX Nat. Gas

$/mmBtu

2.76

UK NBP Nat. Gas

p/th

42.86

LME Aluminum

$/mt

1,695

LME Copper

$/mt

5,590

LME Nickel

$/mt

11,700

LME Zinc

$/mt

2,014

LME Lead

$/mt

1,766

COMEX Gold

$/troy oz

1,173

COMEX Silver

$/troy oz

15.8

COMEX Platinum

$/troy oz

1,066

COMEX Palladium

$/troy oz

676

CBOT Wheat

cent/bu

596

CBOT Soybean

cent/bu

1,015

CBOT Corn

cent/bu

427

ICE Cotton

cent/lb

67

ICE Coffee

cent/lb

125

ICE Cocoa

$/mt

3,278

ICE Sugar

cent/lb

12.5

CME Live Cattle

cent/lb

150.5

CME Lean Hog

cent/lb

76.0

Energy

-6.77

-0.11

-0.16

0.17

0.31
-6.60

3m

6m

12m

31.4

-0.65

40.3

4.84

98.61 102.99 97.25

73.20

48.57

57.95

50.00

49.00

57.00

30.9

-0.16

35.9

0.91

107.87 109.76 103.46 77.07

55.13

63.50

56.00

55.00

62.00

32.4

1.95

33.1

-0.40

2.78

3.00

2.75

1.98

1.60

2.00

1.40

1.49

1.81

30.7

1.57

37.6

6.49

3.01

2.95

2.83

2.32

1.80

1.90

1.58

1.74

1.81

42.2

0.16

43.5

6.37

4.72

4.58

3.95

3.83

2.81

2.74

2.80

3.30

3.50

17.6

-0.66

19.6

4.01

60.72

45.03

43.77

54.72

47.58

43.32

43.00

42.00

38.00

17.4

-0.86

12.7

-6.56

1,753

1,838

2,009

1,976

1,814

1,788

1,800

1,800

1,900

20.8

1.11

19.0

5.23

7,001

6,764

6,976

6,575

5,805

6,047

5,500

5,500

5,200

30.0

-2.25

30.8

2.63

14,702 18,519 18,670 15,926 14,437 13,082 14,000 14,000 15,000

20.6

-2.04

13.3

-5.46

2,025

2,079

2,315

2,242

2,090

2,191

2,100

2,200

2,500

20.7

-2.41

18.8

-6.00

2,124

2,121

2,194

2,011

1,820

1,948

1,800

1,900

2,200

13.8

-0.87

12.0

-0.93

1,294

1,289

1,281

1,202

1,217

1,193

1,180

1,150

1,050

24.3

-0.84

15.9

-9.92

20.5

19.6

19.7

16.5

16.7

16.4

16.4

16.2

15.2

17.2

-0.27

14.5

-1.85

1,429

1,449

1,434

1,231

1,192

1,128

1,170

1,170

1,200

19.98

0.43

22.3

3.32

746

816

863

788

786

758

825

850

861

28.5

1.31

43.1

3.58

617

652

528

556

523

504

530

530

530

21.4

1.61

27.4

14.28

1,356

1,471

1,149

1,008

990

965

875

875

875

25.5

0.89

33.5

15.49

452

479

360

372

385

366

375

375

375

19.4

0.88

20.9

1.10

88

87

66

62

62

65

55

55

60

34.0

-1.95

32.1

-3.09

153

185

181

190

152

134

150

150

150

20.6

0.51

16.1

1.49

2,881

3,004

3,180

2,962

2,889

3,025

3,000

3,000

3,000

22.2

-0.32

26.0

-1.75

16

17

16

16

14

12

13.0

13.0

13.0

11.5

-0.82

13.8

0.76

142

142

154

166

156

154

150.0

145.0

140.0

25.4

2.06

24.9

5.33

100

122

113

91

67

77

70.0

70.0

75.0

Industrial Metals

Precious Metals

Agriculture

-55

-347

-1475

-116

-23

-26

-75

79

77

66

-10

162

0.4

-0.1

-5.1

Monthly change is difference of close on last business day and close a month ago.
Monthly volatility change is difference of average volatility over the past month and that of the prior month (3-mo ATM implied, 1-mo realized).
3
Price forecasts refer to prompt contract price forecasts in 3-, 6-, and 12-months time.
4
Based on LME three month prices.
2

Source: Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research

20

July 8, 2015

Global

S&P GSCI Enhanced Commodity Index and strategies total return and forecasts1
Current
Weight
(%)
S&P GSCI Enhanced Commodity Index
Energy
Industrial Metals
Precious Metals
Agriculture
Livestock

100.0
60.8
8.7
3.8
17.9
8.8

2013
-0.8
5.6
-13.0
-29.7
-18.0
-2.8

2014
-31.1
-42.2
-7.3
-4.1
-9.3
27.0

12-Month
Forward
2015 YTD 12-mo Forecast
-6.6
-6.8
-11.5
-1.0
-3.7
-8.2

0.6
3.5
6.0
-10.0
-12.0
6.0

YTD returns through Jul 06, 2015


Source: Goldman Sachs Global Investment Research

Performance of S&P GSCI Enhanced Commodity Index and Strategies through July 6, 2015
Index and strategies
S&P GSCI Enhanced Index
Energy
Petroleum
Industrial Metals
Precious Metals
Agricultural
Livestock
Commodities
Energy
WTI
Brent
Unlead/RBOB Gas
Heating Oil
Gasoil
Natural Gas
Industrial Metals
Aluminum
Copper
Lead
Nickel
Zinc
Precious Metals
Gold
Silver
Agriculture
CBOT Wheat
KBOT Wheat
Corn
Soybeans
Cotton
Sugar
Coffee
Cocoa
Livestock
Live Cattle
Feeder Cattle
Lean Hogs
All data as of July 06, 2015 close

Dollar
Base Date
Weight
= 100
100.00 Dec-69
60.82 Dec-82
57.70 Dec-82
8.68 Dec-76
3.81 Dec-72
17.95 Dec-69
8.75 Dec-69

6-Jul-15
Level
455.8
856.7
967.6
165.8
304.4
106.2
216.8

2013
-0.8
5.6
5.8
-13.0
-29.7
-18.0
-2.8

2014
-31.1
-42.2
-43.1
-7.3
-4.1
-9.3
27.0

Total Returns (%)


1-Month 3-Month 12-Month
2015 YTD Change Change Change
-6.6
-4.8
-2.7
-38.8
-6.8
-8.9
-4.2
-48.2
-6.7
-9.5
-4.4
-48.9
-11.5
-5.8
-7.0
-20.9
-1.0
0.2
-4.3
-13.4
-3.7
9.2
3.9
-14.0
-8.2
-1.5
0.5
-9.5

19.82
19.98
6.03
5.16
6.70
3.12

Dec-86
Jan-99
Dec-87
Dec-82
Jan-99
Dec-93

924.4
1128.8
1667.9
690.3
768.7
91.1

6.3
8.1
3.8
0.7
3.5
2.0

-42.3
-44.3
-44.2
-36.6
-46.1
-23.3

-10.6
-10.2
13.8
-7.0
2.5
-9.4

-11.2
-10.8
-3.8
-8.4
-5.6
3.1

-5.8
-6.9
6.9
-5.6
-0.6
0.0

-52.8
-51.3
-38.9
-40.8
-42.8
-32.8

2.80
3.80
0.59
0.61
0.88

Dec-90
Dec-76
Jan-95
Dec-92
Dec-90

50.3
479.6
393.4
214.8
115.2

-21.1
-7.9
-7.8
-20.1
-7.4

-2.6
-12.6
-18.6
7.4
3.8

-11.0
-11.1
-5.8
-23.4
-8.3

-4.1
-5.9
-7.4
-11.3
-5.6

-7.1
-6.8
-6.7
-10.5
-5.8

-16.5
-20.9
-20.8
-42.1
-11.8

3.39
0.41

Dec-77
Dec-72

302.7
309.1

-28.6
-36.6

-1.7
-20.4

-1.2
0.2

0.4
-1.7

-3.8
-8.4

-11.5
-26.5

4.32
0.98
5.11
3.26
1.34
1.58
0.83
0.51

Dec-69
Jan-99
Dec-69
Dec-69
Dec-76
Dec-72
Dec-80
Dec-83

59.6
56.8
111.3
468.9
30.6
117.8
29.1
122.0

-26.5
-26.9
-29.0
10.2
5.7
-20.5
-30.8
18.8

-12.5
-4.7
-7.8
-3.2
-21.0
-29.0
38.3
7.0

-1.5
-8.2
-1.4
0.5
10.4
-17.7
-28.9
12.6

14.2
8.5
12.6
11.0
3.7
0.5
-8.9
5.3

11.0
0.9
3.5
5.8
2.6
-3.5
-17.5
17.3

-6.9
-18.5
-7.8
-10.7
-6.2
-41.0
-34.0
6.2

5.09
1.31
2.35

Dec-69
Jan-02
Dec-75

227.3
180.9
179.9

-6.1
-3.8
3.0

26.6
33.0
21.9

-1.4
-0.2
-25.2

0.7
-2.2
-5.6

2.1
-0.5
-2.5

2.4
3.8
-35.0

Source: Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research

21

July 8, 2015

Global

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considerations of the firm's business or client relationships.
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Goldman Sachs Global Investment Research

22