Key Calls: Goldman Reiterates Long Commodities Bias

Ok, so Goldman is out on Tuesday reiterating their Overweight on commodities.

The bank was even kind enough to send Jeff Currie over to CNBC studios to chat with Brian Sullivan.

While the segment was billed as an overview of the bank’s take on commodity prices (which of course rests on assumptions about policy induced inflation pressures emanating from China, among other locales), the conversation predictably deteriorated (and I say “deteriorated” because we’ve heard this from so many analysts at this point that it’s become annoyingly ubiquitous) into a discussion about how high WTI would go if the GOP and the new administration implemented a border-adjusted tax. Recall this from Monday…

U.S. BORDER TAX COULD PUSH WTI TO PREMIUM OVER BRENT: PIONEER
how many people do we need to hear that from?

— Walter White (@heisenbergrpt) January 30, 2017

Anyway, I’m guessing there are more than a few people out there who want to hear the WTI/BTA story again and who knows, there may even be a small contingent of readers interested in Goldman’s rationale for the overall commodities long.

Below, find excerpts from the note referenced in the CNBC segment.

Via Goldman

Economic and policy driven inflation reinforce overweight recommendation

Markets over the past several weeks have been keenly focused on potential policy actions from the Trump administration – corporate tax reform, protectionist tariffs and infrastructure spending – particularly the destination-based border-adjusted tax (BTA), and the implications these policies could have on commodity markets. While the impact of these potential policy actions on growth is debatable, the implications on commodity pricing is mostly inflationary, specifically to US commodity markets which includes foreign markets with US delivery points. Driving these inflationary pressures are frictions that raise near- to medium-term US dollar denominated costs. Although longer-term such policies could be deflationary should global production capacity rise or global demand fall, near-term these potential policy actions join a long list of intentionally inflationary policy actions from OPEC to China that have reinforced a trend from early last year of fundamentally driven economic inflationary pressures. In other words, policy driven inflationary pressures join economic driven pressures to reinforce our overweight recommendation in commodities.

[…]

Since we recommended going overweight commodities late last year, the enhanced S&P GSCI is up c.9%. While this return is nearly twice the equity market and suggests markets have already priced in much of the reflation theme for 2017, we do believe there is still upside from here of c.5%

***

Even though our US economists view implementation of BTA as a low probability event, Damien argues that a switch to BTA at a 20% corporate tax rate would lead to a 25% appreciation of US crude and product prices versus global prices. The practical effect of switching to BTA would be that US firms would exclude export revenues but would no longer deduct import costs when calculating their tax base. While the BTA’s inflationary impact on US service costs and the deflationary impact of USD appreciation on foreign costs should theoretically offset these shifts and push global prices down by 20%, the contracted nature of oil services implies that the BTA will initially create substantially higher returns for US producers. Brian Singer and team argue that while this is bullish US energy equities the ultimate impact depends on how high US prices need to go and in turn, how much additional supply growth this creates. They estimate that an incremental $10/bbl move higher in US prices would drive an additional 700 thousand bpd of US production growth. This significant incentive to ramp up US production in a market that is only starting to rebalance would create a renewed large oil surplus in 2018, likely exacerbated by a reversal of the OPEC cuts, ultimately creating a sell-off in global oil prices. Current WTI and Brent oil futures imply a 15% probability for a shift to BTA.