There may be more on this subject here in the days ahead and Barry Ritholtz is on top of things so far with many related links, but here's a quick look at the latest developments in the continuing story of Goldman Sachs and energy markets, a subject first discussed here back in September (see my previous article Friends in High Places?).
On Monday, the reported reported the following:
It might be a better idea to thank Goldman Sachs, not the weather, for the recent plunge in oil prices.
While recent balmy temperatures have certainly played a role in last week's dip in oil prices, a lesser known, but equally powerful, move by Goldman at the start of the year might bear some responsibility as well. Goldman cut the energy portion by as much as 50 percent in some of the sub-indexes that comprise the widely followed Goldman Sachs Commodity Index, tamping down moves to buy them by large investment funds who mimic Goldman's index.
The changes took effect this month and apply for all of 2007, a Goldman spokesman said.
Crude oil futures plunged 9 percent Wednesday and Thursday to $55 a barrel, before settling Friday at $56.31. The two-day decline was the sharpest since December 2004.
This is part of the annual re-weighting of the index, whereas the change in August involved a switch from one blend of unleaded gasoline to another. Just looking at the information in the story from the Post, this sounds pretty sinister - a cut of "as much as 50 percent in some of the sub-indexes".
The Goldman Sachs website describes how the commodity index is constructed and how changes to the weightings are determined. The average quantity of world production over the last five years determines the weight of each commodity in the index.
If the weighting of oil is plunging, then production must be plunging too - here's some recent world production data from the International Energy Agency:
Looks like steady growth in production as of just a few months ago, unless production fell back dramatically in the last two months of the year.
Maybe a look at the new weightings from the Goldman Sachs website will confirm a year-end plunge in production.
Here's the summary from September of last year - it doesn't look like much has changed since then aside from unleaded gasoline being removed.
Natural gas was was cut increased by 20 percent, RBOB gasoline fell 11 percent, and heating oil fell nine percent. The claim of a 50 percent reduction must have been the combined categories of unleaded and RBOB gasoline that was effectively halved in the most recent update to the weightings.
The story from the Post implies more than one subcategory with huge reductions, but the "as much as 50 percent in some of the sub-indexes" appears to refer to the combined gasoline sub-indexes only.
It looks like we'll have to wait awhile for peak oil to show up at Goldman Sachs.
Related ETF: ISHARES GSCI CMDTY (GSG)