GS: “Net speculative positions are four times as high as in June 2008″
Goldman Sachs rocked oil markets for a second day Tuesday by calling for a nearly $20 fall in Brent crude oil, saying speculators had pushed prices ahead of fundamentals. It was the second warning of a steep market reversal from the long-term commodity bull in as many days. On Monday, Goldman recommended clients close a trade heavily weighted toward U.S. crude futures.
I’ve never been one to say that speculators are the primary driver of oil price fluctuations. Fundamentally, we are at or near the peak in conventional oil production — and that means oil prices will inevitably see higher highs and higher lows (See Science: “Peak oil production may already be here”; HSBC Bank: Oil will be gone in 50 years). And obviously we have a unique amount of unrest across North Africa and the Middle East.
But if the world’s biggest commodity trader commodity trader says speculation is playing a role, one has to listen — especially since Goldman has been predicting higher oil prices for longer than most:
Goldman was one of the first banks to predict $100 oil last decade, in March 2005 when prices were closer to $50 a barrel.
On Tuesday, Goldman chief energy analyst David Greely said the recent run-up in prices, in which Brent rallied as much as 33 percent since the start of the year, looked overdone.
“While prices are back at levels of spring 2008, supply-demand fundamentals are significantly less tight,” Greely said in an April 12 note emailed to clients.
“We believe that the market will experience a substantial correction toward our $105 a barrel near-term target for Brent crude oil in coming months,” he stated.
Oil prices were down sharply, with Brent shedding more than $3 to settle below $121 a barrel. On Monday, prices hit a 2-1/2 year high of $127.02 before reversing….
Goldman analyst Greely said that while unrest in the Middle East and North Africa remains a risk to oil markets, with Libyan exports already largely cut off, the price had been pushed too high by the large number of speculative traders currently long crude oil.
“Both inventories and spare capacity are much higher now and net speculative positions are four times as high as in June 2008,” Greely said.
Exactly how much speculation is driving up oil prices remains contentious:
Goldman estimated in a research note on March 21 that every million barrels of oil held by speculators contributed to an 8 to 10 cent per barrel rise in the oil price.
As unrest spread in North Africa and the Middle East, investors accumulated the equivalent of almost 100 million barrels of oil between mid-February and late March on top of their existing positions, adding approximately $10 to the ‘risk premium’, Goldman said.
Using Goldman’s 8- to 10-cent estimates and data on speculators’ positions from the U.S. Commodity Futures Trading Commission, Reuters calculated that as of last Tuesday, the total speculative premium in U.S. crude oil was between $21.40 and $26.75 a barrel, or about a fifth of last Tuesday’s price. The UK’s Financial Services Authority (FSA) does not publish trader data on Brent.
Goldman Sachs disputed the Reuters calculation on speculative premium.
As I’ve reported, the GOP admits speculation is helping boost oil prices but moves to gut speculation watchdog anyway
In the short term, it will be interesting to see whether Goldman can burst the speculative bubble. In the long-term, though, prices are headed up:
- Least surprising headline of the day: “Exxon Struggles To Find New Oil”
- Science/IEA: World oil crunch looming? Not if we can find six Saudi Arabias!
- Peak oil production coming sooner than expected
- WikiLeaks bombshell: Saudi reserves overstated by 40%, global production plateau immiment
- German military study warns of peak oil crisis
- World’s top energy economist warns: “We have to leave oil before oil leaves us”
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Language Intelligence: Lessons on persuasion from Jesus, Shakespeare, Lincoln, and Lady Gaga
Peak oil is a long term phenomenon. It’s arguable just how long technology changes and going to increasingly heavy and dirty petroleum can delay peak oil. Certainly, as the price rises, it becomes economic to go after heavier and harder to extract oil…and there are huge reserves of this stuff. There is so much heavy oil that we are going to have to deliberately turn away from extracting it, and regulate it by some sort of carbon tax which includes CO2 produced by the extraction process, I think.
Speculation is shorter term, and is of course open to deliberate manipulation to maximize profits, if the player(s) are big enough.
It seemed to me that the corporate media and speculators actually cooperated back during the Bush administration, to create an artificial food shortage and then blame that shortage on biofuel competition for agricultural land. In such a scenario, everybody wins except the consumer and the climate. The speculators make profits and the fossil fuel corporations reduce potential competition.
I think we’re going to have to be very cautious about which corporate media feeding frenzies we join in on, and where we lay blame for possibly artificially created crises.
I do not understand why so much information is available for the stock market and so little for the oil commodity market. For stock traders there is even a volatility index that is traded as well. But for the oil futures market there seem only to be opinions and guesses. What percent of oil production is available to the spot market and how much is tied up in long-term contracts? An oil trader told me a couple of years ago that roughly 5% of oil supply is available for speculation. Is this true? Is the Brent price actually close to the contract price that oil is sold by long-term contract? Does long-term mean a year?
I’ve always felt that speculation in essentials – and yes we have to accept that oil is one of them at the moment – is one of the worst aspects of the current brand of free-market capitalism. Far, far worse of course is speculation on food: that is tantamount to obscene. You really do start playing with other peoples’ lives if that’s what gets you off.
However, as Joe says, it does not remove the underlying factor: regular crude will at some point fairly soon go into a decline in terms of rate of production. This represents a severe challenge to Mankind simply because most people, including those running the show, are deeply uncomfortable with anything outside of Business As Usual.
There are still people on e.g. The Guardian’s website proclaiming that Peak Oil is a “myth”. That might be a cozy short-term blanket to envelop oneself within, but – as with climate destabilisation – reality will come a-calling in due course……
Cheers – John
How do businesses including airlines operate with the uncertainty of oil climbing and dropping by up to almost five times ($147 to $32 from July 11 to December, 2008)? Answer: Poorly.
Could the world come together to say “This is one commodity where we need a fixed price just to operate?”
And if it were up to me (let me check: oh yeah, it still isn’t) that price would be something like $1000 a barrel with all other fossil fuels also taxed 10 times their current price to encourage their use (mostly oil) in only the most necessary manufacturing.
Of course that would be every right wingers biggest fear, global socialism (never mind that every progressive, working government combines socialism with capitalism) and will never happen and we’ll take our worship of the free market to our graves with us, and sooner than we might imagine.
I opened one of my first panels on Peak Oil by saying “I shall read from the Bible” and solemnly opened Bjorn Lomborg’s “The Skeptical Environmentalist” and read how he said that oil would stabilize at $25 a barrel through at least 2020 (or maybe $20 through 2025, I don’t keep a copy, although oddly I noticed multiple copies on shelves outside the office of Roger Pielke, Jr).
That was in April, 2008 when oil first passed $100 a barrel on its way to over $147 a barrel on July 11 of that year. My reading got a lot of horse laughs given how far off the Great Dane’s certitude was – in fact any literal Great Dane could have made a more accurate prediction.
Speaking of Lomborg’s smilingly smarmy certitude (what you get when a turd uses an excess of Certs), he guaranteed David Letterman and the world only a foot of sea level rise by 2100 last night, which is about one-sixth some of the high-end estimates the world’s actual authorities predict.
Why Letterman didn’t turn him over his knee and spank him I have no idea.
Just two posts below in the shale gas post I ranted about this (at #26) so frothingly that Joe kindly edited out the paragraph where my spittle reached a record storm surge. I thank Joe for this kindness (he is an absolutely excellent editor) but recognize that he doesn’t have time for this on a regular basis.
And none of us have time for such Bjidiocy, least of all Gaia and every one of us comprising her.
Saudi Arabia, Saudi Arabia what say you?
Three points:
1) Leland (#1) sums it up perfectly about dirty unconventional oil. We have to leave oil long before oil leaves us.
2) Oil price spikes are one of the best “messaging” opportunities possible to wake people up to the threats of fossil fuels and the need to look for sustainable, safe, stable and renewable alternatives. Oil is dangerous to our future and security for many reasons. Our future don’t gain security by trying to shield the public from the essential nastiness of this beast.
3) Take whatever any big investment bank says with a huge grain of salt. during the latest global meltdown caused by their derivatives monster these investment banks were privately betting their own CDO products were going to fail while publicly flogging them as AAA investments. They knew they were garbage, they actively bet against them…but said nothing about it to their own clients who were buy them from them. In congressional testimony later they were asked if they felt any duty to tell their clients that what they said publicly about their own products they didn’t believe privately and actually bet big money against them…and all said they didn’t think they needed to tell clients this. So who knows what Goldman is really thinking about oil or where they are putting their own money relative to their public pronouncements. Buyer beware.
On ‘The Oil Drum’ member Charles Mackay has been tracking the drop of gasoline inventories so far this year and thinks a super-spike in gasoline prices is all but inevitable. Also, crude shipments have dropped off. I think Goldman-Sachs may be proved wrong in the long run about speculation driving up both crude and gasoline prices.
http://www.theoildrum.com/node/7799#comment-792579
All very interesting, but hard to pin down, and extremely misleading for the average person, who needs to concentrate on the fundamental fact: regardless of financial measurements, it’s getting harder and harder to make civilization out of fossil fuels.
Climate damage is a big part of that for sure, but FF shortages bid fair to hit sooner and, at least at first, harder.
@#5 Richard:
No less an authority than RADM Titley (Oceanographer of the U.S. Navy) estimates SLR by 2100 at about 3 to 6 feet, acknowledging that it may be more than that. He states that the 2007 IPCC Report ignores the contribution of melting glaciers on SLR, instead only using thermal expansion of the oceans for its estimate. See his presentation for a TED conference, with ACC predictions and implications for the Navy beginning at about 15 minutes to the end:
http://www.youtube.com/watch?v=7udNMqRmqV8
He points out that the Navy must plan to adapt facilities and procedures and budget accordingly. He predicts routine shipping going over the North Pole by 2050 for 2 to 3 months of summer to get from China to NY and Europe, with Iceland as the new Singapore. The Navy will need to patrol this “fifth Ocean”.
Then we have articles like today’s “Buy Crude, Could Hit $160: Bank of America”
http://www.cnbc.com/id/42566061
♫ Money money money monehhh. Muuuhnehhh. ♫
I’m sorry, but taking Goldman Sachs advice is, in my opinion, akin to listening to the ‘ratings agencies’ or perhaps a white pointer recommending an invigorating dip in the sea. After all the ‘financial industry’ relies on a steady stream of credulous ‘suckers’, ‘patsies’ or ‘rubes’ to put their grifts into practise. I had a good laugh a couple of years back when two banksters from the late, unlamented, Bear Stearns were caught on tape having a chuckle about how they had unloaded a good deal of toxic ‘securitised assets’, consisting of mostly junk sub-prime NINJA loans, leavened with a little ‘good stuff’ (just like the old con-men ‘salting’ a mining prospect with some gold chips)onto a whole range of willing, because greedy, victims. The most gullible, apparently, were the gullible ‘Ossies’, ie us, or our banks etc to be more precise. The process was made all the easier by the ratings agencies guaranteeing this toxic sludge as ‘AAA’. Caveat emptor.
http://www.bloomberg.com/news/2011-04-14/goldman-traders-tried-to-manipulate-market-in-2007-report-says.html
Osstralians are called “Ossies”?
Richard #14, certain Americans (including these Bear Stearns kleptocrats) mispronounce the appellation. We say ‘Ozzies’, to rhyme with ‘mozzies’ (mosquitoes) but certain individuals, mostly US, say ‘Ossies’. Hopefully it will die out over time.