(Reuters) - Oil supplies are adequate but will tighten later this year as a bull market for industrial commodities gathers force and the focus on gold fades, Goldman Sach's global head of commodities research said on Monday.
On the oil market, Brent is a better benchmark than its U.S. equivalent and should attract investment flows and retain the robust market structure it has held since December, Jeff Currie told Reuters in an interview.
For the month of December, industrial commodities oil and copper outperformed gold, which together with other precious metals was one of the star performers for last year as whole.
Currie said December's trend would continue and "a key theme" of 2011 would be a bull market for cyclical commodities, supported by economic recovery.
Long term, the strongest performers should be the "CCCP group" of crude, copper, corn and beans and platinum -- raw materials for which China, the world's leading commodity market, will have to rely on imports.
Copper, which hit a series of records in December that continued into January, already faces shortages. Oil supplies for now are ample, Currie said, in agreement with the Organization of the Petroleum Exporting Countries, which on Monday published its latest monthly report on supply and demand.
"OPEC is right. The market is relatively well supplied right now," he said.
But that could change by the end of the year, he said.
"Can demand push supply up against the capacity constraints? That's likely to happen in the latter part of 2011 on crude and into 2012."
PRICE STRENGTH NOT YET ALARMING
Reflecting tightening supplies, Goldman has issued a 2011 target for U.S. crude of $105 a barrel -- compared with around $91 on Monday. This year's prices are not expected to be strong enough to derail economic growth.
"It's unlikely to happen this year, when we have high inventories and substantial spare capacity. That would be a 2012 event," Currie said.
High inventories are reflected in a contango market structure for U.S. crude, also known as West Texas Intermediate (WTI), but Brent has switched to the opposite structure backwardation, meaning prompt contracts are more expensive than those for future delivery.
Currie said Brent's backwardation would persist and that the investment flows associated with extra commodity index weighting toward Brent earlier this month could continue.
"We definitely expect to see some growth in the market," Currie said of Brent.
"Brent is the better benchmark without question. WTI is idiosyncratic."
U.S. crude's idiosyncrasies include storage issues at Cushing, Oklahoma, the delivery point for U.S. futures.
Extra capacity is being added in Cushing, which Currie said should prevent any return to supercontango -- a function of storage capacity being full -- but inventory would still be enough to keep U.S. futures in a contango structure.
The combination of contango, large stocks, reduced demand and a struggling economy has been marked by a strong correlation between oil and other raw materials and equities as a range of markets price in long-term economics. That link should weaken.
"There has been a very high correlation between the two (equities and commodities). It's higher when the commodities market is in contango. It becomes lower when we're in backwardation. We're at that point right now," said Currie.
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