Is Goldman Sachs right on the oil price?
Posted on 20 January 2009 with no comments from readersOrder my book online from this link
Goldman Sachs expects oil prices to hit bottom in the first half of this year, and then take off in the second half. This has encouraged big speculators to rent idle oil tankers now to stock up in order to sell later in the year.
However, while that might be helping to keep oil prices above $35 today, you have to wonder what will happen later in the year when all this oil is dumped back onto the market.
Oil price in a recession
You also have to question the logic of Goldman Sachs. These are the same analysts who projected $200 oil last summer when oil peaked at close to $150. We have had a price crash instead, and one that is easily explained by a slump in demand in a global economic recession.
Why should prices suddenly bounce back now? Who were the buyers who sent oil prices up? The hedge funds surely, and they now have their credit lines cut off, so that removes the rocket fuel for an oil price hike.
Indeed, oil speculators could be setting themselves up for another big fall. What if the global economic recession keeps oil demand down and the price actually falls by the second half.
Dumping stocks
Then the storage costs of oil in tankers will have to be paid and the oil dumped at a loss. Dumping oil onto a depressed market would send oil prices even lower.
Don’t investors get it. This market is completely different. In an economic boom these leveraged trades make sense, in an economic recession they are suicidal.
Expect to see a few more oil speculators join the likes of T. Boone Pickens in losing billions on badly timed speculation in this market. Oil prices will recover at some stage, and oil stocks will hit bargain prices before that happens but jumping back too early into any market is not bright.
no Comments posted by readers:
Am not really sure you have a better understanding of Dubai compared to anyone else.. your reading of the property market three months back leaves me with a lot of room for second guessing…
To be fair I called the market turn in the first week of October and Emirates Business 24/7 axed my regular column as a consequence. Here is the article they would not print: http://arabianmoney.net/2008/10/06/cityscape-dubai-event-an-acid-test-for-off-plan-sales/
But I was late in calling the market turn – but then few predicted the oil price crash which has set this all in motion.
People very quickly forget that anybody taking up my initial ’strong buy’ real estate recommendation on AME Info in 2002 did amazingly well – actually still not everybody, some do buy me the odd drink as they are still very much in the money.
But I can not think of an economic commentator anywhere who is not being attacked for something – and generally with good reason but people love to find somebody to blame – it is never your own fault is it?
Your #1 tip in your ameinfo column of 25-Nov-2007:
“1. Sell off any shares, hedge funds, mutual funds and other financial instruments held in Western markets, and just do it without any further waiting around.”
I recall I was impressed by the forthright instruction to “just do it” but unfortunately I didn’t.
Today I would say just sit on cash in UAE dirhams or UAE dollars, plus up to 50% in precious metals or associated assets. There will come a point to buy other assets again but this is just not yet it.
However, this is only my view and it could be wrong – but this gives you downside protection in a falling market.
$25 oil is just around the corner. I expect to see $25 by February. We should break the $30 barrier soon.
What on earth makes you think seasoned speculators would “dump oil onto a depressed market”?
When the cost of holding it any longer exceeded their expected gain then they would dump it. Logic is not always followed in oil markets: remember how Opec increased production into the Asian Financial Crisis and sent prices below $10 in 1999?