(Reuters) - Persistent backwardation should drive commodity markets upward in 2018 and help them outperform others in the longer term, Goldman Sachs said on Tuesday, more than doubling its forecast rate of return for the asset class.
Expecting lower crude oil inventories next year due to supply cuts in a balanced market, the investment bank last week raised its Brent and West Texas Intermediate average spot price forecasts for 2018 to $62 and $57.5 per barrel.
Oil supply cuts this year have helped to whittle away an excess of inventories built up following a global supply glut that began to emerge in late 2014.
“We don’t see the oil market shifting back into contango in 2018 and see other metal markets potentially joining zinc in a level of backwardation,” Goldman said in a note on Tuesday.
Backwardation, in which a futures contract trades below the commodity’s expected spot price at the contract’s maturity, is an indicator of a tight market.
“The demand backdrop today is now even stronger than a year ago ... On a long-term basis, the shift of the business cycle leads us to expect commodities to outperform other asset classes, even as policy makers are forced to hike (interest) rates,” Goldman said.
It maintained its 12-month overweight recommendation, forecasting a return of almost 10 percent compared with the 4 percent it predicted in October.
“Given that equities are supported by robust views around future growth, should these views falter even as current activity remains robust, commodities should outperform equities and other asset classes,” it added.
For the broader industrial metals index, Goldman expects returns to be mostly flat in 2018 and is bullish on copper and bearish for aluminum.
With one eye on the rapidly rising price of bitcoin, Goldman said it did not believe the cryptocurrency was taking demand away from gold.
“While the lack of liquidity and increased volatility may keep bitcoin interesting, it is unlikely to convince investors looking for the kind of diversification and hedging benefits which gold has proven to possess over its long history,” Goldman said.
Bitcoin hit a record high of $17,270 on Monday.
Reporting by Karen Rodrigues and Nallur Sethruaman in Bengaluru; editing by John Stonestreet
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