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The Big Bank “Oil War” Is Officially Underway

by | published April 15th, 2011

Sometimes the big guys are pretty obvious in telegraphing their true intentions.

Take two separate announcements on oil prices that have come our way in the last few days.

First, on Tuesday, April 12, Goldman Sachs Inc. (NYSE:GS) issued a very bearish call on oil that suggested the price was going down.

In the kind of analysis that can only be done on the Street, Goldman advised selling commodities in general, but targeted Brent (London) crude oil for particular comment.

That’s right – the august investment bank that brought onto us a bubble implosion in the subprime mortgage market and the synthetic debt that gave new meaning to the term “moral hazard” is now going after oil.

Goldman says Brent prices will be coming down to about $105 a barrel, more than a 15% drop from its price just before the bank did its thing (it was $123.99 at close on April 11).

The rationale? They see demand destruction emerging in the U.S., while supplies of crude remain historically high worldwide.

Forget, for the moment, that demand destruction can only be measured longitudinally. (You need several quarters of figures before you can identify a trend forming.)

Then there’s the fact that they seem to have already concluded that a supply shock – not a demand shock – is causing the price decline. (I really need to get my hands on their magic algorithms, would save me a ton and a half of analysis.)

And the cause of the supply-side problem is none other that Libya and its paltry share of daily global volume. (See “Why the Latest from Libya Won’t Really Affect the Oil Market,” March 28.)

Now I have written extensively that the supply coming on-line is of lower quality and arising from parts of the world that require greater investment. That would certainly prompt a rise in prices, but there is absolutely no indication that we are facing a decline in availability.

How could we? Just a few paragraphs earlier, Goldman was talking about the unparalleled supply surplus experienced in the market.

But just to get the cause-effect dynamics straight here…

According to Goldman, there will be a decline in price because of demand destruction (that cannot be measured yet), caused by supply-side problems, prompted by… too much supply.

Now I do not deny that the heightened volatility and instability coming into the oil market will move prices in both directions. But there is no demand-destruction scenario working its way out at the moment.

The assumption is that unfettered price rises will result in one, but it is far too early to call it.

Still, Goldman’s announcement caused crude futures prices to tumble by 2.5%, or almost $3.10 a barrel, in London and about the same amount, or $2.87 a barrel, in New York West Texas Intermediate (WTI) trading.

But they did not stay there.

At the close yesterday, crude was back above $122 in London and north of $108 in New York.

While we were trying to digest Goldman’s analysis and determine what it was actually supposed to mean, guess what happened one day later?

Another Mega-Player Sees Demand Acceleration

On Wednesday, April 13, Bank of America Corp. (NYSE:BAC) Merrill Lynch issued an appraisal saying there was a 30% chance that Brent could hit $160 a barrel this year.

This insight uses some of the same indicators as Goldman’s, yet it moves in the opposite direction.

Look at what is said in this version: “With oil demand expanding rapidly and Libya production down by at least one million barrels a day, we forecast [the] Brent crude oil price to average $122 dollars a barrel in the second quarter, and believe prices could briefly break through $140 dollars in the next three months.”

One mega-market player sees demand destruction; another sees demand acceleration.

Excuse me for thinking something else is going on here…

Somebody Engineered A Short on the Price of Oil

This is all about jerking the price of crude oil short-term to satisfy the trading side at big houses. It reminds me of a kid walking down the street playing with a yo-yo.

Goldman is one of the largest players in the oil futures market. There are indications, from time to time, that the bigger houses place less-than-balanced bets up and down the futures curve. Yet this time, somebody seems to have gotten it wrong.

Traders have been openly talking about a pullback in crude prices. The WTI price, after all, spiked in New York from $97.18 on March 15 to $112.79 on April 8 in New York – more than 16% in 18 trading sessions. During the same period In London, Brent rose from $108.52 to $126.65, a gain of almost 17%.

Looks like somebody engineered a short on the price… and, when it did not happen on its own, decided to see it through by other means.

If you think Goldman isn’t up to such antics, think again.

The most publicized oil trading collapse during the highly volatile period in mid-2008 was SemGroup Corp. The trader had so many cross-contracts that had to be unwound that its inability to perform sent shockwaves through the market.

Well, almost as soon as the problems at SemGroup started, attention was directed to Goldman and the large positions it established on the other side of the unfolding SemGroup mess. Before the dust settled on that one, some traders were privately saying Goldman had fixed the oil market to dictate price… and yo-yo prices up and down so as to profit in both directions.

Hey, in my book, once a bottom feeder, always a bottom feeder.

But what about Bank of America going so heavily in the opposite direction this week?

Maybe Merrill had decided to go long anyway or peg options to take advantage by counter-balancing the Goldman announcement. (By the way, I cannot replicate the crunching of figures on Merrill’s direction, either.)

One thing seems certain… These are not the last outbursts the market is going to hear in this erupting “oil war” of the big banks.

Sincerely,

Kent

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  1. David N
    April 15th, 2011 at 11:08 | #1

    Does GS still own that suez tanker full of crude? If they are in a short play dumping that on the market should help teir position. Like you said a bottom feeder you have to watch both hands.

  2. Steve
    April 15th, 2011 at 11:25 | #2

    Meanwhile, this is done with taxpayer dollars. You can only get rich by investing others money.

  3. Jonathan Macfarland
    April 15th, 2011 at 11:28 | #3

    I admit I am still learning about financial definitions but if Goldman issued a “bullish” statement on oil, would that not indicate that the price of oil is going UP and not down as mentioned by you?

  4. Will MacPheat
    April 15th, 2011 at 12:11 | #4

    Oil supply has been running about 6 million barrels a day ABOVE demand for some time now. OPEC members have been openly talking about increasing production to make up for any Libyian shortfall. What I have to ask is why have oil prices gone up at all? That’s what seems to have been engineering – big money bottom feeders driving up the price of oil just so that they can suck money from the little guy’s pockets.

  5. Editor
    April 15th, 2011 at 12:12 | #5

    @Jonathan Macfarland
    Jonathan, you are absolutely right. We apologize for the error and have corrected it above. Thanks for pointing it out!

  6. Peter Borromeo
    April 15th, 2011 at 12:41 | #6

    Thanks for telling me I was probably right in assuming that Goldman was just trying to cover its short positions. The gullibility of the Wall Street crowd in reacting to Goldman’s self-serving call reminds me of the story of the 19th century showman and circus founder, P. T. Barnum, who loved to say “a sucker is born every minute.” Obviously he was wrong because according to the US Census Bureau it is more frequent than that!

  7. Alan Waring
    April 15th, 2011 at 13:01 | #7

    Thanks Dr. Kent for explaining what these rats are really up to. Many of us see such public comments as said by the “Big Guys” for their own ends (our money), but can’t understand how exactly they do it. Still don’t completely understand, but your candid (and not so candid) comments are greatly appreciated. CNBC is curiously silent.

    Many thanks!

  8. F Mosso
    April 15th, 2011 at 14:05 | #8

    I don’t do business with GS, but I just see the Fed is investigating them AGAIN, so I treat their comments like I do the FDA, when they say
    Yes it is good or BUY I just do the opposite and am right most times. On the t.v. spot yesterday, it seems GS does the opposite they tell their clients to do hummmm

  9. Michel
    April 15th, 2011 at 15:48 | #9

    BEWARE the self-interest of big-money institutions, particularly the investment banks – they’ll screw with your head (by way of self-serving “opinions” – in order to walk away with your money. Has always been/always will be the case! I’m far from religious, but I vaguely recall from early childhood a warning in the Bible about “Beware the Money Changers”. Ill-informed as your opinion may be, trust me, it’s more reliable than that of a “money changer”. Best of luck. SwingTimer

  10. Farok Ardesher
    April 16th, 2011 at 00:32 | #10

    DID SOMEONE SAY DEMAND DESTRUCTION??? Between India and China, over 15 million new vehicles have hit the road in the last 12 months. Both countries are enjoying an ever expanding middle class.I wish people in the press would stop blaming speculators and take Economics 101,
    Price is the equilibrium of DEMAND and SUPPLY.

  11. J Peters
    April 16th, 2011 at 12:29 | #11

    Seems to me the price needs to stay about $100/barrel – to keep our US Govt afloat – without the oil companies tax revenue – our Govt will go BK

  12. Dell Roark
    April 16th, 2011 at 14:24 | #12

    GS was Hitlers banker in WW2 and should not be able to work in the good old USA

  13. hadenough
    April 17th, 2011 at 00:14 | #13

    Hopefully, ONE DAY THE OIL WILL DRY AND TURN TO TAR AT GS,AND THEN WE CAN TAR AND FEATHER THESE PARISITIC CRIMINALS.AND I AM SURE WE COULD FIND A FEW MORE TO HANG WITH G S.

  14. Thinkor
    April 18th, 2011 at 05:33 | #14

    I don’t know whether it plays much of a role in GS’s forecasts, but QE2 will probably end June 31st as promised, at least for a few months before QE3, if only to preserve some shred of credibility for the Fed. If so, there is a very good chance of a second dip in the “recession” with interest rates rising sharply, precipitating a major decline in stocks and a rise in bankruptcies and unemployment. As national income falls, there would be a very much reduced demand for oil, much as in 2008/2009 when oil prices dropped about 2/3rds, although I would expect a less spectacular fall this time due to heightened awareness world-wide about the inability of supply to keep up with demand in a world at full employment. (All this IMHO.)

    I think I understand your comment about demand destruction only being measurable longitudinally, but that doesn’t mean such destruction can’t be predicted with a high degree of confidence based on a scenario like the above.

  15. moreland
    April 18th, 2011 at 23:20 | #15

    What is the role of Japanese demand, based on the post earthquake economy?

  16. jim candler
    April 19th, 2011 at 23:31 | #16

    The moment I heard GS bearish call on crude, it smelled of manipulation. Not too long ago, wasn’t GS one of those claiming oil will hit $150+ by end of 2011? They probably took profits from $110-113 and then went short before their announcement, riding it all the way down to $105 (their new target) and are now going long back up again. We can expect another comment from them soon claiming to have miscalculated and that crude is once again heading for $150 just to jerk the price in their favor. I don’t believe they were ever on the wrong side of crude.

  17. Jim Z
    April 22nd, 2011 at 17:50 | #17

    Perhaps Goldman Sachs is part of the Obama/government conspiracy that is trying to get rid of the constitution and make the U.S. a marxist/socialist/communist country. It is already appearing that the radical, illogical moves made by Comrade Obama are ripping his popularity in the polls. Not only has the devaluation of the dollar resulted in precious metals, commodities, etc. moving MUCH higher, oil prices in particular have doubled since Obama became President. Since the poor economy will be his undoing in the 2012 election, Goldman is recommending their bearish call on crude and all commodities in an attempt to help Comrade Obama. When you look at all of the ex-Goldman employees in Obama’s cabinet, etc. it is a no brainer. Goldman is quite possibly the biggest company involved in the conspiracy.

  18. May 14th, 2011 at 09:20 | #18

    The most disturbing thing I find in this oil mess we are in is our Government always trying to artificially lower oil/gas prices. The reason is our politicians are concerned with getting reelected rather than doing what is right for the Country.
    This Country has a major and astronomical energy consumption problem and the only plain and simple way to fix it is to hit your average American and business in their wallet.
    I conduct energy audits of buildings and the waste I see every day is enough energy to probably power all of Europe. We have the technology and means to reduce our energy consumption in half simply from energy conservation and efficiency.

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