Lessons from Goldman Sachs' Departing Commodities Head

Goldman Sachs bids farewell to Jeff Currie, who has served as the head of its commodities research team for 27 years. As a parting gift, Currie's team has compiled a list of ten valuable lessons learned during their tenure.

Lesson 1: Understanding Investment Cycles and Oil Prices

One key insight is the understanding of how investment cycles impact oil prices. The team recognizes the dynamics of fuel substitution as a tool to mitigate fundamental imbalances in the market. Their research has contributed significantly to better comprehension of how the physical nature of commodities and potential bottlenecks affect pricing.

Lesson 8: Cartels and Curve Shape Control

Contrary to popular belief, cartels can manipulate the curve shape but not the long-term price. Over time, prices are determined by the marginal high-cost producer. OPEC, which has relatively easy access to oil reserves, operates differently as the largest cartel.

Although OPEC's control over prices may seem limited, it still holds significant power. Non-OPEC producers, especially U.S. shale companies committed to fiscal discipline, can amplify OPEC's influence on pricing. The three rounds of production cuts since last fall, in combination with solid demand, have been key drivers of the recent rally in oil prices. As a result, the Goldman team forecasts that Brent crude prices will reach $100 per barrel by 2024.

Lesson 3: The Spot Asset Nature of the Oil Market

According to research, the oil market is more influenced by spot assets rather than anticipatory factors. The team found that oil prices respond four times more strongly to supply shocks happening in the present, such as weather disruptions, compared to future events like OPEC announcements on production levels in the coming quarters.

Tracking the Top Projects

The team emphasizes the importance of monitoring the top projects in the industry. Among the 477 projects scheduled for the next seven years, these ventures will account for over 50% of global oil and gas supply. Currently, the cost curve is steepening while output is decreasing due to project delays, cost inflation, and higher taxes.

By reflecting on these valuable lessons, market participants can navigate the ever-changing landscape of commodities with increased knowledge and confidence.