From Energy to Metals: Why to Still Diversify Into Commodities

Research evidence excerpt

From Energy to Metals: Why to Still Diversify Into Commodities

Goldman Sachs Commodity Views

Commodities Can Help Diversify Equities/Bonds’ Risks Under a Broad Range of Circumstances

1. A large energy shock, the second in only five years. While the 2022 energy crisis

impacted mostly natural gas supply, lifting liquefied natural gas (LNG) prices across

Europe and Asia, this year’s 16-week Strait of Hormuz disruption significantly reduced

supply of both oil and gas, causing a broad increase in energy prices, while threatening

the global economic outlook. Even as crude oil prices now recede following the US-Iran

deal to re-open the Strait of Hormuz, broad commodity price gains year to date,

combined with a strong oil roll yield1 during the conflict, have supported year-to-date

commodity returns well above those of equity and bonds (Exhibit 1), though with higher

volatility.

Exhibit 1: The Strait of Hormuz disruption contributed to commodity returns outperforming other assets year to date,

especially as a strong roll yield for oil combined with higher prices

Source: Bloomberg, Goldman Sachs Global Investment Research

Importantly, the upside to energy prices during the conflict was limited by what proved

to be a more flexible global market than what we originally expected. In particular, the

sharp drop in China liquefied natural gas (LNG) imports in Mar/Apr, the first two months

of the conflict, and in oil imports to this day, helped limit global market tightness. Still, by

May, three months into the conflict, crude oil and oil product (like gasoline, diesel and jet

fuel) prices had rallied 43% and 63%, respectively, vs pre-war levels, while European gas

and Asia LNG prices rallied 50% and 70%. And while crude oil prices have come off