Goldman Sachs recommends going long on commodity index, oil in 2020

Credit: REUTERS/Nick Oxford

Goldman Sachs said on Monday its top 2020 trade recommendation is to be long its commodities index, with the best returns likely to come from oil, reasoning that a decline in overall capital expenditure would in turn result in reduced supply.

Bank has seen "sharp and visible" drop in capital expenditure

Maintains $60/barrel Brent forecast for 2020

Expects 10% oil returns in 2020 from carry trade

Also maintains $1,600/oz price target for gold

Nov 25 (Reuters) - Goldman Sachs said on Monday its top 2020 trade recommendation is to be long its commodities index, with the best returns likely to come from oil, reasoning that a decline in overall capital expenditure would in turn result in reduced supply.

"In 2020 and for the rest of this coming decade, we believe the old economy will be focused on cleaning up its excesses of too much debt, emissions, and capacity which is compounded from the redundancies created by de-carbonization," the Wall Street bank said in a note.

"Each of these themes support our 2020 top trade recommendation to be long the oil-heavy Enhanced S&P GSCI index .SPGSES."

Commodity prices remained steady despite weak demand growth in 2019 due to reduced supply resulting from declining capital expenditure, it added.

That "sharp and visible drop" in capex gives OPEC+ (the Organization of the Petroleum Exporting Countries, Russia and other producers) confidence that it can continue to manage oil surpluses in 2020 despite the large expected surge in non-OPEC production next year, the bank said.

"Absent growth or geopolitical shocks, we expect Brent to continue trading around $60 per barrel in 2020 as OPEC cuts and slowed shale activity will be needed to offset strongly rising supply elsewhere," Goldman said.

Despite this steady outlook for benchmark oil prices, Goldman sees oil returns of 10% next year due to the 'carry' structure of the market where nearby oil prices are higher than deferred contracts and allow investors to capture returns as they roll positions along the futures curve once contracts expire.

The bank also expects OPEC and its allies, when they meet on Dec. 5, to extend existing oil output cuts until mid-2020 with non-OPEC oil producer Russia supporting Saudi Arabia's push for stable oil prices amid the listing of state oil giant Saudi Aramco. O/R

Goldman Sachs forecast returns of -0.7%, 2.8% and 6% over a 3, 6 and 12-month period respectively on its S&P GSCI commodity index. Over the 12-month horizon, Goldman saw returns of 7.4% from energy, 8.4% for precious metals, followed by 4.9% for industrial metals.

Goldman maintained its bullish target of $1,600 per ounce for gold, reasoning that factors including heightened political uncertainty and an only modest acceleration in growth supported investment demand.

(Reporting by Eileen Soreng in Bengaluru; Editing by Shailesh Kuber)

((eileen.soreng@thomsonreuters.com; Within U.S. +1 646 223 8780, Outside U.S. +91 80 6749 6131; Reuters Messaging: eileen.soreng.thomsonreuters.com@reuters.net))

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