The Tell: Here’s why Goldman’s commodity guru Currie is bullish on oil after 8% drubbing

It’s safe to dredge back into the murky oil market, say the commodity experts at Goldman Sachs.

Indeed, Goldman’s Jeff Currie believes that after the worst single-session decline for U.S. crude-oil in three years that it’s time to consider investing in the embattled commodity, which last week deepened a bear-market retreat, characterized as a tumble of at least 20% from a recent peak.

Check out: 7 key reasons the ‘bottom is falling out’ of oil prices on Black Friday

Speaking on CNBC late-morning Monday, Currie said the recent bout of panicky selling in crude doesn’t accurately reflect supply-demand fundamentals and “far surpasses any fundamental drivers.”

His remarks on CNBC reflect similar comments made in a Goldman Sach’s Nov. 26 research report: “While it may be tempting to attribute the sell-off to U.S. foreign policy, current fundamentals remain intact and the price decline is too big. Instead, commodities are pricing a much more dire demand outlook than other asset classes, which goes even beyond the potential repricing of supply. So clearly something else is amiss,” the investment bank’s researchers wrote.

Instead, Currie said the crude downdraft is more of a technical nature, attributing it to traders’ placing overly bullish wagers on oil, that prices would rise, which then had to be unwound; and which, in turn, accelerated the recent elevator-ride lower for black gold.

The closely followed commodity researcher said, “there is no indication of a recession-like demand,” referring to mounting fears that the persistent, and stunning, slump in oil from a 52-week high hit on Oct. 3. Sluggish growth in Europe and concerns that the U.S. -China trade spat was exacerbating a slowdown in Beijing have also fostered anxiety among investors.

Those worries also whacked equity markets, with the Dow Jones Industrial Average

DJIA, +1.46%

SP 500 index

SPX, +1.56%

 and the Nasdaq Composite Index

COMP, +2.05%

ringing up their worst performances during the abbreviated trading Thanksgiving period since 2011, which dragged the SP 500 into correction, usually defined as a decline of at least 10% from a recent peak.

What’s going to take oil (and other commodities for that matter) higher?

Currie—echoing comments in the Monday research report—said a face-to-face meeting on the sidelines of the Group of 20 meeting on Friday in Buenos Aires between President Donald Trump and China President Xi Jinping could provide the catalyst that lifts crude, if it results in at least a pause in tensions between Beijing and Washington.

Currie said Goldman is forecasting a 40% chance that a pause in tariff hostilities is achieved at the convention, with a 10% probability of an outright resolution of some kind. Goldman believes that China has an incentive to resolve its trade difference because of the apparent drag on the word’s second-largest economy. “Although uncertainties remain high, we believe this week’s G-20 meeting could be a catalyst for commodities to rebound. Many of the political uncertainties weighing on commodity markets have a significant chance of being addressed in Buenos Aires,” Goldman wrote.

Another key driver for crude may be the Dec. 6 meeting of the Organization of the Petroleum Exporting Countries and other major oil producers in Vienna. Currie expects a production cut to occur at the meeting and says such a move is in the best interest of all parties, despite President Donald Trump’s repeated entreaties for lower crude prices from Saudi Arabia and OPEC.

A decline in crude oil prices is viewed by Trump as a tax cut for average consumers, but Goldman makes the case that lower oil can have detrimental effects on credit markets and the U.S. energy sector

XLE, +1.53%

The Goldman analysts say that so-called break-even levels, the cost it takes to extract crude, for shale-oil producers is between $50 a barrel and $55, and that breaches of those levels would hurt revenues for major energy outfits.

On top of that, Currie said 15% of high-yield debt is issued by energy-related entities and further declines risk delivering a punishing blow to the balance sheets of those companies that drill, transport and otherwise deal in energy products. “If you go below $50 [a barrel],…it becomes a credit market problem,” he told CNBC (see chart below).




Read: Why falling oil prices are now a net drag on the U.S. economy

As of midday Monday, January West Texas Intermediate crude

CLF9, +2.30%

 was up $1.70, or 3.4%, to $52.12 a barrel on the New York Mercantile Exchange. In a holiday-shortened session on Friday, the contract plunged 7.7% to settle at $50.42, marking the worst session since July 6, 2015 and the lowest settlement since Oct. 9, 2017, according to Dow Jones Market Data.

Meanwhile, Goldman said an easing of trade tensions could also deliver a boost to the commodity complex more broadly, including copper prices

HGZ9, -0.48%

and other industrial metals, as long as a recession doesn’t take hold.

“Because commodities are spot assets and price current growth, they typically act as a diversifying asset with oil and commodity prices spiking until macroeconomic concerns turns into an outright recession, which diminishes commodity demand. However, we are seeing no such demand weakness,” Goldman wrote.

Mark DeCambre is MarketWatch’s markets editor. He is based in New York. Follow him on Twitter @mdecambre.

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