Wednesday 13 April 2011

Goldmans & the Price of Oil

18 months ago Goldmans offered an analysis which seemed pretty compelling to me. It charted in detail the rise and fall of the oil price 2007-2009, and showed how, when the global recovery had run for a short while - they specifically predicted turn-of-2010 - based on the fundamentals oil would steam ahead into 3 figures again, which would be the way of the world thenceforward. (You'll perhaps have noted that I was still persuaded of this, and other arguments, at the time we made our 2011 predictions.) This view wasn't universally held: amazingly, right up until the end of last year some 'reputable econometric forecasters' (oxymoron) were still seeing oil in only 2 figures for the whole of 2011.

Anyway, Goldmans were right: and the only thing that can upset the applecart on a sustained basis (i.e. more than just a bit of dithering either side of $100 for a while) will be the dreaded GlobalRecession2.

So how come the vampire squid is now advising clients to ditch oil & other commodities ?
Is GR2 just around the corner - or is it just a bit of tactical trading advice ?

it seems that copper demand has been boosted artificially by the Chinese playing games - or has it ? ... and so you don't have to go far to assemble a Conspiracy Theory. Goldmans certainly caused oil to dip on Tues. But it hasn't lasted long, has it - so what's fundamentally changed ?

Hmm ?

Nothing that I can see. Now, about that conspiracy ...



Old BE said...

What interests me is that there have been periods when the oil price has risen to huge heights and everyone has said "this is here to stay" and then the price has collapsed right back down to a fraction of its prevailing level.

I remember $20 oil and it wasn't that long ago!!

Nick Drew said...

$10 was only 1998 (when BP went on its spending spree - a real stroke)

but I tell you, it is only GR2 that will bring it down this time

(but hey, ...)

alan said...

I agree. I dont see anything out there that would bring down the price of oil except for another recession.

What would happen if the UK (or Japan, Euro) suddenly had its credit rating downgraded? I would be shocked if the US rating agencies downgraded the US rating.

PIMCO has gone short on US debt.

And there are credible stories that, once taking into account off balance sheet debt, the US debt is close to 500% of GDP.

China has had a negative trade imbalance for the last 3 months, which has got a few people scratching their heads.

Even if the largest light sweet oil field ever known was suddenly discovered, it would still take 10 yrs to get online. If Libya suddenly became peaceful I'm guessing you would only see a small drop in prices.

I didn't think that the situation in Iraq had improved dramatically so doubt they will be suddenly increasing production by 1m bbl a day.

Major outbreak of civil war in Saudi, Iran or Venezuela? But how would Goldmans know.

Goldman's might have positions open on oil?gold?silver going in the wrong direction and this is fake news, but wouldn't the sec give them a major spanking for trying that?

GR2 gets my vote.

Oddball ideas in next comment...

Old BE said...

But what triggered those previous collapses? Anything? Nothing? Something small? I am not predicting anything there I am just saying that assumptions, etc..

alan said...

The only possible oddball I can think of would be the discovery of a new source of energy. Fusion is the only viable contender. But even if there was a major breakthrough in fusion, there would still be a long lag period before it would start to reduce oil consumption.

From memory 70% of oil is used for transportation, Converting the worlds transportation fleets to electricity would be a major, long term, exercise.

Road transportation is still difficult to replace without a major breakthrough in battery technology, but moving most road transport to rail is possible.

Airplanes cant be converted to electric without going back to propellers and would need even better batteries than road transport requires.

Container ships could only get converted if the fusion reactor was very small. (most fusion designs are the size of a container ship).

Current electrical generation is mostly from coal/nuclear fission. Replacing electrical plants with fusion would probably increase oil consumption (transportation) in the short term.

Allegedly, Greece is building a cold fusion power plant based on the Italian cold fusion project. I still have a hard time believing cold fusion is true.

In the hot fusion camp. I follow a lot of fusion projects, but none of them are close to net energy output. Dense plasma focus fusion MIGHT be close, but that's at least a year off and only in the lab; they would still need to build a prototype power plant to prove it would work at scale.

Would a major breakthrough in ultra cheap energy cause a drop in oil/commodities prices in the near future? I dont think so. Long term yes (except for copper).

GR2 still gets my vote.

alan said...

BE - Short answer.

Last century oil prices were about supply. Previous highs were when the oil taps were turned off ('70s). Previous lows where when the taps where turned on.

This century oil prices have been (mostly) about demand (consumption). Supply has maxed out, forcing high prices. A drop in consumption (recession) has caused prices to drop. Economic growth has then increased consumption and higher oil prices.

Nick Drew said...

thanks alan, great list of points for pondering

BE the collapse from $147 was just bouncing off the ceiling at a time of great uncertainty, value of oil wasn't 147 in 2008 but it wasn't 39 either

whenever you get close to S/D balance in any commodity, volatility ensues

other low points (1986, 1988) were the end-points of relatively gentle drifts down

Nick Drew said...

PS the Conspiracy Theorists wouldn't give you much chance of the SEC or any of them policing market manipulation, coz they reckon it's happening all the time (frequently at the behest of Uncle Sam ...)

that's conspiracies for you