As recession fears continue to circle the broader markets and stocks remain volatile amid Fed uncertainty, analysts from Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) have highlighted an opportunity in oil.
Goldman Sachs Thesis: Fears of an impending recession have grown "excessive," according to Goldman Sachs. As a result, the firm sees an opportunity in commodities amid recent weakness.
"Judging by recent price action, we find commodities are pricing a recession more so than any other asset class. Pitted against that, our economists view the risk of a recession outside Europe in the next 12 months as relatively low," Goldman Sachs wrote in a note to clients on Monday.
The company believes the economy is likely to remain in a long late-cycle stage for a while, which could see equities underperform as inflation stays elevated.
"We believe commodities, on the other hand, are the best asset class to own during a late-cycle phase where demand remains above supply. Thus, as our strategists are calling for a renewed reduction in risk appetite, we believe the correlation of commodities to other risky assets is set to fall again," Goldman Sachs said.
Total commodity returns have been very strong in this phase of the commodity cycle in the past. Goldman Sachs expects energy and agriculture to lead commodities higher. Brent crude oil and petroleum products are poised to move higher as seasonality turns more favorable and lower prices stimulate demand, the firm said.
"On a relative basis, oil prices now look cheap compared to global gas prices and even thermal coal given the run-up in these markets that oil has completely lacked. With oil the commodity of last resort in an era of severe energy shortages, we believe the pullback in the entire oil complex provides an attractive entry point for long-only investments," Goldman said.
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Morgan Stanley Thesis: Morgan Stanley also released a positive note on oil this week. The firm's oil strategist, Martijn Rats, sees an "increasingly constructive setup" for oil heading into 2023.
U.S. total product demand has averaged about 4% lower on a year-over-year basis since June, largely driven by gasoline. Even with demand softening, the supply outlook remains tight, Morgan Stanley said.
"Overall, supply risks remain pronounced and on the demand side, the recent slowdown should give way to a recovery as we head into next year. Once growth inevitably picks up again, market tensions should re-emerge," Morgan Stanley wrote in a note to clients.
Oil Price Action: At press time Tuesday, WTI crude was down 5.44% at $91.80, while Brent crude, the international benchmark, was down 5.93% at $98.90.
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