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Goldman Sachs Asset Management Statement on the Russia-Ukraine War. Read it here .


April 14, 2022 | GSAM Connect

Commodities On The Climb

Many asset classes have seen red since the beginning of the year, but commodity markets have maintained their momentum after a strong 2021. The Russia-Ukraine war has pushed commodity prices—especially oil—even higher. We think fundamental factors, particularly on the supply side, may continue to support oil this year. With higher energy prices and other price pressures, investors may see moderated economic growth and prolonged inflation, both in the US and Europe, potentially accelerating monetary policy tightening.

Even before Russia’s invasion of Ukraine, energy markets had been undersupplied. Energy companies have struggled to increase production amid a lack of accessible wells, and long-term corporate incentives to rebuild inventory have diminished as economies move away from fossil fuels. Consequently, the United States Baker Hughes Rig Count, a key supply measure representing drilling rigs actively exploring for or developing oil or natural gas in the United States, has been slow to recover from pandemic lows. As Exhibit 1 shows, the last time oil prices were above $100/bbl, the United States Baker Hughes Rig Count was at 1,562, well over double its current level of 5331.

Exhibit 1: Mismatch Between Price and Investment

Exhibit 1: Mismatch Between Price and Investment

Source: Bloomberg and Goldman Sachs Asset Management. As of April 1, 2022. Past performance does not guarantee future results, which may vary.

Outside the US, OPEC+ has only modestly increased output, despite calls for more accommodation from Western leaders. Even if output targets were raised further, major producers have struggled to hit existing goals. In our view, the Russia-Ukraine war has amplified concerns in energy markets, as Russia contributes 11% of the world’s oil, despite being just 3% of world GDP2. As Western sanctions and isolation become more embedded, disruption in energy markets may pass through to the real economy in the form of softer growth and higher inflation as consumers’ spending power falls.

Exhibit 2: Potential Impact of a $30/bbl Price Shock on 2022

Exhibit 2: Potential Impact of a $30/bbl Price Shock on 2022

Source: Goldman Sachs Global Investment Research and Goldman Sachs Asset Management. As of March 8, 2022. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved.

As Exhibit 2 illustrates, a $30/bbl spike in oil prices would boost inflation in the US and Europe, potentially adding 0.8 percentage points to headline inflation in each region for 2022 and subsequently lowering economic output. European activity may take more of a hit, as economic sensitivities to energy differ across regions. Still, we expect current impacts to be less severe than those experienced during past oil shocks as US energy intensity has declined 50% over the last four decades3. However, higher energy prices will likely reinforce policymakers’ decisions for a more hawkish rate trajectory. Overall, this backdrop might further compel a tactical tilt toward commodities as the asset class has tended to fare favorably in past periods with similar tailwinds.

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John Tousley, CFA

John Tousley, CFA

Managing Director, Senior Market and Economic Strategist

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