The Goldman Sachs Long Call on Oil

January 20th, 2009

WARNING: This is not a recommendation to buy, sell or hold any financial instrument.

People are hammering my inbox with this story.

I try to ignore anything that oozes out of GS. The fact that their analysis is even in the same ballpark as mine makes me wonder if my original fundamental analysis was deeply flawed. My tactical/technical analysis certainly was, as my initial nibble on oil is down something like 15%.

I am not sweating this for three reasons:

1. If you knew the size of my position, you’d laugh your tits off. It’s not much.

2. I’m slowly accumulating.

3. I smell a rat.

I wouldn’t trust a GS call any further than I could throw it, and I wouldn’t piss on GS if it was on fire. I’m holding my long oil position anyway, despite what those f*&%$#@ think/say/do. A major part of my interest in buying oil was GSs’ call (back in November 2008) that there wasn’t much upside potential for oil. Have they been loading up long as they shilled it lower?

I’ll be buggered if I know.

Here’s what I do know: Below $30 I’ll start to look at taking a non-trivial long position in oil, assuming a total financial collapse/nuclear war/Mad Max situation hasn’t broken out by then…

Just look at the contango situation… * shaking head * This is crazy. I don’t know what is going to happen, but something is up. Unfortunately, this will only make sense in hindsight; in the aftermath of whatever ______ (fill in the blank) is planned.

Again, it’s VERY counter intuitive to be buying a commodity that’s going lower, day after day, but I smell a rat here. The same rat that I smelled, when oil was $140, is present down here. I didn’t (and don’t) have the stones to short oil at any price. But under $40??? Come on. It’s hard for me to resist the temptation to stock up down here.

If anyone can think of a better medium to long term bet than buying oil, by all means, let us in on it.

And from a foilhead perspective: For the masters of the universe, it’s a VERY simple matter to plunge the world into an energy related crisis overnight. The Saudis could do it by staging a show at their Ras Tanura facility, arguably the most strategic energy facility in the world. One facility destroyed or damaged and oil gaps higher. Hey, if you want to keep overnighting your Lamborghini 6,500 miles to Britain for routine maintenance… Well, let’s just say that you’ve got to break a few eggs if you want to make an omelet.

Friendly reminder: This is a trading related post. If you want to comment, please make sure that the comment is related to oil, the financial markets, etc.

Via: Bloomberg:

Goldman Sachs Group Inc. commodity analyst Jeffrey Currie said he expects a “swift and violent rebound” in energy prices in the second half of the year.

Oil prices may have reached their lowest point already, after falling to $32.40 in mid-December, and are expected to rise to $65 by the end of this year, the analyst said. There is scope for a “new bull market” in oil, Currie said.

World oil demand is likely to fall by about 1.6 million barrels a day this year, the Goldman analyst said today at a conference in London. That’s bigger than the reduction expected by the International Energy Agency, which last week forecast a decrease of about 500,000 barrels a day, or 0.6 percent, this year.

A recent tactic of using supertankers to store crude oil to take advantage of higher prices later this year is “difficult” to profit from and is “near the end of this process” anyway, the Goldman analyst said.

New York crude futures for delivery in December, trading near $56 a barrel, currently cost some $15 a barrel more than March futures, a market situation known as contango, where prices are higher for later delivery.

The contango is likely to flatten as supply cuts by OPEC and other producers take effect, reducing the availability of oil for immediate delivery, Currie said.

The Organization of Petroleum Exporting Countries started another round of supply cutbacks at the start of this month. The group’s compliance with its overall efforts to cut production will probably peak at 75 percent, or a reduction of about 3 million barrels a day out of an announced aim of 4.2 million barrels a day, Goldman Sachs said.

In several steps, 10 OPEC members have pledged to reduce production to 24.845 million barrels a day, a cut of 4.2 million barrels a day from September’s level.

Morgan Stanley hired an oil tanker to store crude oil in the Gulf of Mexico, joining Citigroup Inc. and Royal Dutch Shell Plc in trying to profit from the contango, two shipbrokers said in reports earlier today.

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2 Responses to “The Goldman Sachs Long Call on Oil”

  1. pdugan Says:

    “I try to ignore anything that oozes out of GS. The fact that their analysis is even in the same ballpark as mine makes me wonder if my original fundamental analysis was deeply flawed.”

    Heh, I feel the same way about anything Nouriel Roubini says, with the obvious exception.

    Gold had an explosive rally this morning, I went short right at the, as of yet, top, expecting it to pull back down as it correlates to the dollar index, then just as violently careen upwards when this manufactured crisis gets underway.

    For oil, long term, I expect it to see meteoric inflationary rises in tighter spurts followed by wave consolidation, and I expect it to be outperformed by gold over the next year. Once gold is 60% to 100% higher and violently ranging in that, ´81 style, we´ll start to see more consolidated speculative longs on gold.

    Putin is doing their budget with oil at $41, for what that´s worth. Probably more than Goldman Sachs.

    Here´s my technical analysis on Brent using crude tools, mean-filtered fractals and elliot waves: wave 5 on the 1-day, which may be the apex of a bearish wave 2 on the 1-week, just touched down right around Christmas, and this pullback is roughly the culmination of wave b on the 1-day. Same story for gold, at least on the 1 day. I think now is a great time to long oil, and a few days will be a good time to call gold. I think today´s rally in gold is a violent manifestation of wave b fulfillment driven by the inaugeration sentiment, and will pull back to correlate with the dollar index, until the index itself starts to plummet…

  2. Aaron Says:

    People may have already seen this article from the Oil Drum
    but I found it usefulfor it’s analysis of what happens after a product supply peaks (extreme fluctuations in price obviously) with an interesting comparison with the whale oil market which peaked in 1850.

    If comments from GS are this difficult to get to the bottom of, I wonder if we’d be better off ignoring them and just focusing on the reality of a post-peak environment. They may be able to influence a market at times but GS can’t totally control it.

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