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When Goldman Sachs talks, do people still listen?

|Includes: BJI, Goldman Sachs Group Inc. (GS), ICE, NMX, OIL

From: Seeking Alpha Editorial Team

To: Bob van der Valk

Dear Bob van der Valk

Our editors have declined to publish your submission for the following reasons:


  • It doesn’t meet Seeking Alpha's guidelines for published articles
  • This piece is too accusatory with a clear aim of inciting against Goldman Sachs, yet uses nothing more than speculation in lieu of proof. Such statements as "Goldman Sachs has enough investors following their advice to be able to control the ups and down for WTI crude oil" are the author's opinion, but do not ultimately make for an actionable, reasoned piece of analysis.
Response from the author to the above email received from Seeking Alpha editorial team on April 15th:

This article was originally submitted for publication to you on April 13th, then updated by me on the 14th.  The Seeking Alpha "feedback" was received on the 15th.  The offending sentence was removed by me and article resubmitted for publication.  Apparently it still does not meet the guidelines for published articles since I not received another response from the Seeking Alpha editorial team:

Following is the expurgated article, which was submitted to Seeking Alpha for publication:

When Goldman Sachs talks, do people still listen?

April 14, 2011

This year is an instant replay off 2008 with the average price of regular gasoline in the US expected to reach $4 per gallon in the next month with the investment banks leading the charge in manipulating the price of crude oil. Californians already surpassed that mark and perhaps heading for $4.50 per gallon by Memorial Day.
The question I am asked most these days is why prices jumped so fast and who is making all that extra money. Answer: There are three main beneficiaries including the vertically integrated major oil companies, major bank investment hedge funds and the Organization of Petroleum Exporting Countries (OPEC).
On Monday this week Jeffrey Currie, the global head of commodities at Goldman Sachs (NYSE:GS), told his clients that rising demand from emerging market players earlier this year had been overtaken by a supply shock driven by the North Africa and Middle East (NASDAQ:NAME) unrest. He said:

"That has had the effect of introducing more downside risk into the trade, particularly given record levels of speculative longs (trading) in crude"
In other words Jeffrey Currie advised them to sell – sell - sell West Texas Intermediate (NYSE:WTI) crude oil and investors, like lemmings, followed him off the cliff. The WTI crude oil price reacted almost immediately with an almost $6 a barrel drop on Monday and Tuesday.  Wednesday's Energy Information Administration (NYSEMKT:EIA) Department of Energy (DOE) inventory report shook the world of crude oil back to the reality and prices firmed back up almost immediately.
The price of crude oil is not based purely on supply and demand and has a speculative element built into it, which is heavily influenced by money flows from the big hedge funds such as Goldman Sachs and Morgan Stanley. In other words Jeffrey Currie pulled a head fake and his investors were willing to go along with him.
Lloyd Blankfein, the CEO of GS, made his now infamous remark to the Sunday Times of London on November 8, 2009 saying: “Investment bankers are just doing God's work”. Today the NAME unrest has caused increases in crude oil prices and investment banks are taking full advantage of the opportunities to make money for their investors. In any other times this would be called war profiteering but now it is considered business as usual with Gordon Gekko’s motto “greed is good” back in vogue
WTI is being used as the short leg of a spread involving funds playing off the NAME unrest. Investors are going long on Brent and shorting WTI then moving in and out of that spread whenever economic data is released in the US.
The chart* below indicates we now have a significant disconnect between WTI and Brent futures in recent months.  The black line shows the New York Mercantile Exchange (NYMEX) WTI and the red line shows the ICE Brent front month futures with the green line showing the basis (difference) between the two prices:

* Chart source - Mercatus Energy Advisors

Brent has thereby become more indicative of the world crude oil price and the price direction for US gasoline prices.

The following chart produced by Doug Short shows the differential between WTI crude oil and the average price of gasoline for the last 10 years:

There are good reasons for the WTI prices to take a big dump in the next few weeks with crude oil inventories at Cushing at an all time high. The direct connection to supply and demand was lost after paper traders took over managing those inventories at the Cushing, Oklahoma hub.
On Wednesday the benchmark WTI crude oil price closed up 86 cents at $107.11 a barrel on the New York Mercantile Exchange. The contract decreased $3.67 to settle at $106.25 a barrel on Tuesday.
The Intercontinental Exchange (NYSE:ICE) in London posted Brent crude oil for May delivery went up near $123 a barrel.
The Organization of Petroleum Exporting Countries (OPEC) said higher prices have begun to chip away at fuel consumption, but did not call for an emergency meeting to address the situation.
Meanwhile the vertically integrated oil companies are keeping mum on the subject but their first quarter 2011 reports will show exactly how much more they have made in profits over the same quarter in 2010.

Yesterday's deficit speech by President Obama did not touch the additional cost of fuel due to the speculative factor involved in the market.  However, a $435 billion “marker” in President Barack Obama’s proposed budget could be a secret gas tax, but it is unclear from where the “phantom revenue” would come in the proposed administration’s 2012 spending plan.

President Obama could soon make another call for a windfall profits tax on major oil companies, which would bring in nearly a billion dollars a day for the US treasury.  He called for just such a tax during his campaign in 2008 at the height of the last speculative run up in gasoline taxes.
In the end the additional cost of crude oil comes directly out of the pockets of US gasoline consumers.  The current high prices are costing consumers $360 million dollars per day more versus the price paid last year at the pump. 

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.