Sometimes the big guys are pretty obvious in telegraphing their true intentions. Take two separate announcements on oil prices that have come our way in the last few days.
First, on April 12, Goldman Sachs Inc. (GS) issued a very bullish call on oil that suggested the price was going down. In the kind of analysis that can only be done on the Street, Goldman advised selling commodities in general, but targeted Brent (London) crude oil for particular comment.
That's right: The august investment bank that brought onto us a bubble implosion in the subprime mortgage market and the synthetic debt that gave new meaning to the term "moral hazard" is now going after oil.
Goldman says Brent prices will be coming down to about $105 a barrel, more than a 15% drop from its price just before the bank did its thing (it was $123.99 at close on April 11). The rationale? It sees demand destruction emerging in the U.S. while supplies of crude remain historically high worldwide.
Forget, for the moment, that demand destruction can only be measured longitudinally. (You need several quarters of figures before you can identify a trend forming.) Then there's the fact that GS seems to have already concluded that a supply shock – not a demand shock – is causing the price decline. (I really need to get my hands on its magic algorithms, which would save me a ton and a half of analysis.)
And the cause of the supply-side problem is none other that Libya and its paltry share of daily global volume. (See "Why the Latest from Libya Won't Really Affect the Oil Market," March 28.)
Now I have written extensively that the supply coming on-line is of lower quality and arising from parts of the world that require greater investment. That would certainly prompt a rise in prices, but there is absolutely no indication that we are facing a decline in availability.
How could we? Just a few paragraphs earlier, Goldman was talking about the unparalleled supply surplus experienced in the market. But just to get the cause-effect dynamics straight here …
According to Goldman, there will be a decline in price because of demand destruction (that cannot be measured yet), caused by supply-side problems, prompted by … too much supply.
I do not deny that the heightened volatility and instability coming into the oil market will move prices in both directions. But there is no demand-destruction scenario working its way out at the moment. The assumption is that unfettered price rises will result in one, but it is far too early to call it.
Still, Goldman's announcement caused crude futures prices to tumble by 2.5%, or almost $3.10 a barrel, in London and about the same amount, or $2.87 a barrel, in New York West Texas Intermediate (WTI) trading.
But they did not stay there. At the close yesterday, crude was back above $122 in London and north of $108 in New York.
While we were trying to digest Goldman's analysis and determine what it was actually supposed to mean, guess what happened one day later?
Another Mega-Player Sees Demand Acceleration
On April 13, Bank of America Corp. (BAC) Merrill Lynch issued an appraisal saying there was a 30% chance that Brent could hit $160 a barrel this year. This insight uses some of the same indicators as Goldman's, yet it moves in the opposite direction.
Look at what is said in this version:
With oil demand expanding rapidly and Libya production down by at least one million barrels a day, we forecast [the] Brent crude oil price to average $122 dollars a barrel in the second quarter, and believe prices could briefly break through $140 dollars in the next three months.
One mega-market player sees demand destruction; another sees demand acceleration. Excuse me for thinking something else is going on here …
Somebody Engineered A Short on the Price of Oil
This is all about jerking the price of crude oil short-term to satisfy the trading side at big houses. It reminds me of a kid walking down the street playing with a yo-yo.
Goldman is one of the largest players in the oil futures market. There are indications, from time to time, that the bigger houses place less-than-balanced bets up and down the futures curve. Yet this time, somebody seems to have gotten it wrong.
Traders have been openly talking about a pullback in crude prices. The WTI price, after all, spiked in New York from $97.18 on March 15 to $112.79 on April 8 in New York – more than 16% in 18 trading sessions. During the same period In London, Brent rose from $108.52 to $126.65, a gain of almost 17%.
Looks like somebody engineered a short on the price -- and, when it did not happen on its own, decided to see it through by other means.
If you think Goldman isn't up to such antics, think again. The most publicized oil trading collapse during the highly volatile period in mid-2008 was SemGroup Corp (SEMG). The trader had so many cross-contracts that had to be unwound that its inability to perform sent shockwaves through the market.
Almost as soon as the problems at SemGroup started, attention was directed to Goldman and the large positions it established on the other side of the unfolding SemGroup mess. Before the dust settled on that one, some traders were privately saying Goldman had fixed the oil market to dictate price … and yo-yo prices up and down so as to profit in both directions.
Hey, in my book, once a bottom feeder, always a bottom feeder.
But what about Bank of America going so heavily in the opposite direction this week? Maybe Merrill had decided to go long anyway, or peg options to take advantage by counter-balancing the Goldman announcement. (By the way, I cannot replicate the crunching of figures on Merrill's direction, either.)
One thing seems certain: These are not the last outbursts the market is going to hear in this erupting "oil war" of the big banks.