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.
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”