Goldman's Wonky Oil Predictions: What Gives?

Just eight months ago, with oil prices on their way up, Goldman Sachs boldly predicted an oil price of up to $200 per barrel. This raising of Goldman's target price for oil followed similar periodic target price raises as the price of oil had been climbing for years. A few days ago, in a sharp turnaround, a new Goldman report predicted the oil price would drop to $30 a barrel by next year.

Goldman Sachs is supposed to employ some of the most brilliant minds in the world. Yet its predictions give the appearance of a firm simply extrapolating the market's momentum. Is all this time, effort and money spent on short-term price predictions worthwhile? When we met with Warren Buffett a few months ago, he made it pretty clear that he doesn't think anyone can predict the short-term price of anything.

Many have raised the possibility that Goldman makes such periodic price predictions in order to manipulate markets so it can profit from trades. Whatever the case may be, relying on analyst predictions does not appear to be a fruitful method of generating profits.

In related posts on "analyst predictions gone bad",last month we looked at what analysts were saying about Lehman Brothers (LEHMQ.PK), Fannie Mae (FNM) and Freddie Mac (FRE), and Washington Mutual (WM) right before each of them went down.

Disclosure: None

Comments

[Ferdinand E...:]

Is a comment really needed? The demand for oil is obviously tied to GNP in the big oil consuming countries (ceteris paribus). When that GNP goes 'wonky' in the wrong direction - that is to say South - the demand for oil can also be expected to move South. As for the "brilliant minds" employed by GS, I wonder if that evaluation is really correct.Try looking into the record of those brilliant minds with share prices.

An interesting question here is what would have happened to oil prices if there had NOT been a macroeconomic meltdown. Well, I dont see why they wouldn't have reached $200/b. As someone said to me, there were so many lies in circulation about oil and the persons dealing in it that anything could have happened.

Ferdinand E. Banks

2008 Dec 18 08:29 AM

[Chris Butler_:]

Mr. Banks-

Your comment "An interesting question here is what would have happened to oil prices if there had NOT been a macroeconomic meltdown. Well, I dont see why they wouldn't have reached $200/b" makes the author's point.

There WAS a macroeconomic meltdown and anyone making economic forecasts should account for that probability in their models. Because economists have never been able to forecast these meltdowns consistently, the problem is with (a) the models they use, or (b) the whole enterprise of econometric forecasting.

Given that these wonderfully intelligent folks employed to do this kind of work make premium incomes for their labor, I'd discount possibility (a). These people know how to build models using state-of-the-art techniques.

Perhaps Buffet is correct on this one. The answer is (b). Complex social systems like global financial markets should be even more difficult to predict than complex physical systems, like the weather. And we all know how hard the weather is to predict even over a one-week time frame.

2008 Dec 18 08:50 AM

[farmer448:]

Bubbles bubbles and more bubbles. If an analyst was true, they would have looked at the oil bubble in the early 70's and concluded their was no way oil would go to 200.

The theory then was oil pricing was inelastic. Then low and behold, inelastic became sticky and the price of oil dived. Japanese cars became mainstream in the US market due to mileage.

Same thing when the Southeast Asian crisis hit and demand fell.

Conclusion: Goldman analysts were pumping oil and probably making a tom of money off it.

2008 Dec 18 09:27 AM

[Jason Rines...:]

Yep. It didn't take a rocket scientist analytic model to know that on top of all the consumer debt, $4 gas and $5 heating oil would finish killing off consumer spending. To me it seemed the straw that broke the camels back.


On Dec 18 08:50 AM Chris Butler wrote:

> Mr. Banks-
>
> Your comment "An interesting question here is what would have happened
> to oil prices if there had NOT been a macroeconomic meltdown. Well,
> I dont see why they wouldn't have reached $200/b" makes the author's
> point.
>
> There WAS a macroeconomic meltdown and anyone making economic forecasts
> should account for that probability in their models. Because economists
> have never been able to forecast these meltdowns consistently, the
> problem is with (a) the models they use, or (b) the whole enterprise
> of econometric forecasting.
>
> Given that these wonderfully intelligent folks employed to do this
> kind of work make premium incomes for their labor, I'd discount possibility
> (a). These people know how to build models using state-of-the-art
> techniques.
>
> Perhaps Buffet is correct on this one. The answer is (b). Complex
> social systems like global financial markets should be even more
> difficult to predict than complex physical systems, like the weather.
> And we all know how hard the weather is to predict even over a one-week
> time frame.

2008 Dec 18 10:10 AM

[danmcco:]

GS 200 prediction marked the top. I suspect new prediction marks the bottom : )

2008 Dec 18 12:42 PM

[Ames Tiedeman:]

I agree completely. GS is just trailing the market.

My prediction is 50-60 oil by June, 2009.

2008 Dec 20 11:59 AM