On April 13, 2011, I wrote that the crude oil market was due for a correction. I called for West Texas Intermediate (WTI) crude oil prices to pull back as far as their February highs of around $92.50 per barrel (bbl) and for Brent crude to fall to as low as $108/bbl from its April highs of $127/bbl.
— Elliott Gue, The Energy Strategist
I don’t mind investment banks like Goldman Sachs (NYSE: GS) making short-term trading calls. After all, 45% of Goldman’s first-quarter revenue ($5.3 billion) came from executing fixed income/currency/commodity/equity trades for its clients. However, I don’t like Goldman using long-term fundamental rationales for short-term trading calls, only to reverse those trading calls without explaining how the fundamental rationale has changed.
Case in point: Goldman’s recent sell/buy whipsaw on crude oil. Back on April 14th, I wrote about Goldman’s sell call on commodities, which included a recommendation to sell Brent crude oil. At the time, Brent July futures were selling for $120 per barrel and Goldman said it expected the price to fall to $105. The rationale was based on fundamental supply/demand factors:
While prices are back at levels of spring 2008, supply-demand fundamentals are significantly less tight.
The unfolding events in North Africa and the Middle East have pushed up Brent crude oil from $100/bbl in mid-February to over $125/bbl last Friday. These high prices levels invite comparison to the spring of 2008, when crude oil prices first breached these levels in May before peaking at over $145/bbl by early July. We believe that there are fundamental differences between now and the spring of 2008: Both inventories and spare capacity are much higher now and net speculative positions are four times as high as in June 2008.
Inventories and spare capacity are long-term fundamental issues that don’t change overnight. Consequently, Goldman’s $105 price target for Brent crude oil should have been valid for a number of months.
Goldman Sachs Reverses Course on Crude Oil
It took only three weeks for Goldman to change its tune on crude oil. Brent crude never made it down to $105, hitting a low of $105.15 on May 6th. In a May 6th note to clients, Goldman analysts wrote:
We expect oil prices to return to or surpass the recent highs by next year. We continue to believe that the oil supply-demand fundamentals will tighten further over the course of this year, and likely reach critically tight levels by early next year.
What happened to the “fundamental differences” in the crude oil market between now and spring 2008? Aren’t inventories and spare capacity – three weeks later — still “much higher” than they were in June 2008? Not a word from Goldman explaining why these fundamental issues that it trumpeted so loudly in its April 12th sell call were no longer relevant on May 6th. It burns me up and makes me think its April 12th fundamental-based sell rationale was bogus and just window dressing for its short-term trading recommendation, which was really just based on technical analysis/chart reading.
Goldman Sachs Issues Buy Recommendation on Crude Oil
Then last week on May 23rd, Goldman completed its flip-flop, recommending that clients buy December 2012 Brent crude oil futures (BRN2Z-ICE) at $105.16 and raising its Brent crude oil price forecast to $115/bbl, $120/bbl, and $130/bbl on a 3, 6, and 12 month horizon. Goldman’s rationale:
We expect that the ongoing loss of Libyan production and disappointing non-OPEC production will continue to tighten the oil market to critically tight levels in early 2012, with rising industry cost pressures likely to be felt this year.
It is only a matter of time until inventories and OPEC spare capacity will become effectively exhausted, requiring higher oil prices to restrain demand.
In the week since Goldman’s buy call, Brent December 2012 futures have risen 5.8% from $105.16 to $111.26:
No doubt about it; Goldman’s short-term trading calls on crude oil have been right on the money. I just wish Goldman analysts would give us the real reason for their calls – technical analysis — rather than fundamental hooey.
The bullish case for crude oil prices is strong, but it’s worth contemplating the following question: how can oil prices rise much further if economic growth continues to decelerate? Goldman Sachs recently downgraded its outlook for both U.S. and global economic growth. I guess stagflation may be on the horizon.
Invest in Oil Stocks with the Help of the Energy Strategist
Elliott Gue, editor of the market-beating Energy Strategist investment service predicted the recent oil price decline as well as the bullish rebound even better than Goldman Sachs. He has strong buy recommendations on several oil and natural gas stocks right now.
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