The whipsaw action in commodities during the last month makes gyrations in the stock market look tame. The autumn meltdown created such a risk-averse environment that traders dumped positions across asset classes, including energy and metals. Crude oil prices, for example, declined 75 percent from their peak, only to double off the bottom in December, and a similar story can be said about copper, an important industrial metal. The fate of natural gas has been worse for producers -- a 75 percent decline, but with no accompanying bounce.
Goldman Sachs (GS) believes there's opportunity in this situation, accord to FT Alphaville. As credit markets seized and commodities prices declined, the incentives and ability for major commodity producers to make long-term investments evaporated as well, leaving the same fundamental supply shortages that led to the prior commodities bull market in place for another sustained rally.
"We expect a commodity supply shortage in 2010 . . . We have long emphasized that the commodity problem is, at heart, a supply shortage due to decades of suboptimal investment, which has been exacerbated over the past year by the sharp drop in prices and tight credit conditions. As the commodity markets rebound with the broader global economy we expect a redux of 2008 when severe supply constraints forced the rationing of demand through sharply higher prices to keep the markets balanced," the Goldman note said.
The thesis relies heavily on emerging market demand, which the Goldman team described as "strong," adding that "the structural rise in prices that has been a key feature of commodity markets for the past several years would not have occurred if supply were sufficient." In other words: the rest of the world is developing, and they need raw materials to do that -- raw materials that aren't currently available -- and prices will rise to reflect that imbalance.
Goldman's bullish note comes as part of a series of such calls by the firm this week, which also boosted its target on the S&P 500 ($INX) and second half 2009 GDP, although the latter is not exactly what it seems. Though Goldman's favored stocks to play such a rally are heavily tilted toward oil and natural gas producers and drilling servicers, there's not much evidence that commodity demand is picking up right now. As DailyFinance noted earlier, the Baltic Dry Index -- a key measure of the demand to ship bulk commodities -- and the Baltic Dirty Tanker Index -- a measure of the demand for oil tankers -- have fallen sharply in the last two months.
James Cullen edits and writes at CollegeAnalysts.com. He is the Vice-President of the Boston College Investment Club, which owns GS, but has no personal position in the stocks mentioned above.