China worries, but Goldman, Morgan Stanley gung-ho on commodities

Goldman Sachs Group Inc. and Morgan Stanley kept their bullish view on oil and copper, predicting a global recovery in the second half that will push up prices. Both banks maintained their Brent-crude forecasts even after a 4.2 percent decline in the second quarter. The world economy will accelerate in the second half, boosting demand and helping raw materials with supply constraints, Goldman analysts led by London-based Jeffrey Currie said in a report dated today. Commodity prices tracked by the Standard & Poor's GSCI Index of 24 raw materials lost 7.8 percent in the second quarter, the worst performance since 2008, as a record earthquake hit Japan, the U.S. expansion slowed and China tightened monetary policy. Commodity assets under management dropped $26 billion in May, the most since October 2008, according to Barclays Capital. “Prices and returns will rise further later this year and into 2012,” the Goldman analysts said. The S&P GSCI Enhanced Index will return 20 percent in the next 12 months, they said. Europe's sovereign-debt problems as well as China's above- target inflation will continue to create near-term volatility, Goldman said. China, the world's top consumer of energy, metals and grains, raised its benchmark interest rates by 25 basis points yesterday, the third time this year after inflation accelerated to the fastest pace since July 2008. The U.S. economy will expand between 2.7 percent to 2.9 percent this year, down from forecasts ranging from 3.1 percent to 3.3 percent in April, the Federal Reserve said last month. Brent Crude Goldman predicted Brent crude will advance to $130 a barrel in a year's time, while Morgan Stanley analysts led by New York- based Hussein Allidina said it will average $120 this year, increasing to $130 in 2012. Brent crude oil advanced 0.8 percent to $114.51 a barrel as of 10:43 a.m. London time today. Oil prices will be “pressured” in coming weeks after a release of strategic oil stockpiles by member countries of the International Energy Agency and will rise later in the year as inventories shrink, Morgan Stanley said. “We remain bullish oil, particularly in the second half, and expect inventory draws will prompt OPEC to increase production, at the expense of spare capacity,” Allidina said in the report dated yesterday. Copper will benefit from Chinese demand as the world's largest buyer has started restocking, Allidina said. The metal will increase to $11,000 a metric ton in 12 months, Goldman said, also citing increased purchases from China. Buy Corn, Soybeans Investors should buy corn and soybeans, Morgan Stanley said, after prices tumbled 17 percent and 6 percent last month. “We view the recent weakness in agriculture prices as a buying opportunity,” the analysts said. Not every firm is as bullish on commodities. There could be a “bull trap,” said Edward Meir, senior commodity analyst at MF Global Holdings in Darien, Connecticut. Europe's debt crisis has not yet ended because other nations apart from Greece such as Portugal, Italy and Spain have similar problems, he said. U.S. unemployment, higher interest rates in the euro zone and China are among factors that “do not make the case for being long commodities that compelling,” Meir said in a report received today. The European Central Bank will raise interest rates for a second time this year, increasing the benchmark by 25 basis points to 1.5 percent, when council members meet in Frankfurt today, according to all 55 economist forecasts in a Bloomberg News survey. The central bank may increase borrowing costs further in the fourth quarter, according to a separate survey. Goldman said there is “upside” to natural gas prices at the U.K. National Balancing Point because of a “tightening shift” in the global market for liquefied natural gas after the shutdown of some nuclear plants in Japan and the loss of Libyan oil and gas exports. --Bloomberg News--