Goldman Sachs’ Advice to Sell Oil Futures Triggers Big Price Fall
Goldman Sachs' headquarters in New York. The financial giant told investors to sell oil investments, sparking a dramatic fall in the global price of oil. (image: abcnews.com)
Calls from financial investment giant Goldman Sachs to sell oil investments saw the price of crude and heating oil dive this week as investors cashed in inflated oil contracts for profit.
But do these dramatic developments signal an end to rallying commodity markets and a long-term drop in global oil prices? Or is it simply a short-term readjustment ahead of further price hikes? Unfortunately for motorists and consumers, the latter is more likely.
Goldman investors rushing to sell “CCCP basket” investments – which encompass bets on rising oil, copper and other commodity prices – made an immediate dent in Monday’s oil prices. The price continued to plummet on Tuesday.
“The ‘music’ stopped suddenly yesterday and panic set in,” hedge fund manager Dennis Gartman said.
Goldman is one of the biggest Wall Street investment firms and has earned a reputation for bullish acquisition of commodities, earning shareholders million of dollars in profits. Its investors have made a handy 25 percent return on their basket investments in the last four months alone. Just a few months ago, Goldman predicted the price of oil would hit pre-financial crisis levels (around $125 to $130 a barrel) by the end of this year .
However, as Texas crude nudged $113 a barrel and the average price for gasoline climbed towards the $4 a gallon mark – the highest prices in two-and-a-half years – the powers that be at Goldman decided enough – at least for the time being – was enough. They told investors to get out and take the money. Why?
Oil has been on a great run. But there is now concern soaring prices are dampening oil demand, adding inflationary pressures and undermining the tentative global economic recovery.
The International Energy Agency predicted Monday that world growth would slow to 4.4 percent this year – citing global oil prices as a key risk. And OPEC, which represents some of the biggest oil producing nations – yesterday said prices were already denting oil demand as motorists cut back on gasoline or bought more fuel-efficient cars.
And as demand for oil tapers off, so too does the price of oil contracts – hence the advice from Goldman to its investors.
Goldman’s commodity team leader Jeffrey Currie said the firm believed basket investments had “upside potential” over the next 12 months, but are now responding to a “nascent sign of oil demand destruction”.
“In the near term risk-reward no longer favors being long [betting basket investment prices will rise]“.
Currie’s statement indicates Goldman still sees oil as a viable long-term investment, which means this week’s dramatic falls are probably just an aberration in an otherwise upward tract.
“What’s important is Currie believes the long-term view is still intact,” CNBC reported. “Rather, Goldman’s caution is focused in the near-term and suggests the commodities bull market is running out of steam.”
With continuing unrest in oil producing countries in the Middle East and northern Africa threatening confidence in supply and consistent speculative interest in long-term price increases, you can bet prices will jump again soon. This week’s falls were just a short-term development setting the stage for “another buying opportunity”, CNBC reported – which could work in Goldman’s favor.
“As Goldman Sachs states they are positive long-term prices,” proprietary trader Michael Langford said. “This means if they can push prices down in the short term they can reset their positions to take advantage of where they believe commodity prices are headed. Strategically a smart and profitable move by the bank.”
So instead of relief, consumers must brace for further price hikes at the pump when filling up their cars, or purchasing heating oil to warm their homes. And as rising oil prices affect the price of all transported goods – notably food – that means less disposable income for the foreseeable future.
Many market observers believe that regulatory measures to control the effect of unchecked speculation on the price of oil could offer some long-term relief. Such measures are currently being considered by government oversight agencies but are still mired in delays.
