Friday, April 01, 2005

The Goldman Gurus: Two Years Too Late

Just two months ago, Abbey Joseph Cohen told Barron’s the following, regarding Goldman Sachs’ oil group forecast:

Over the next 12 months we expect oil to average over $40 a barrel, and that could continue into '06. But we're pricing $28 a barrel into our earnings estimates.

This was completely consensus stuff—oil was trading at $42 or so at the time—and typical of the Cohen/Goldman model of forecasting, which is, like all sell-side forecasters with longevity, to not be so far off consensus you open yourself to ridicule, and to never say anything that makes your clients feel bad about what they own or don’t own.

Yesterday, however, Goldman dropped this bombshell on the markets following crude oil’s stubborn refusal to go below $50 a barrel last month:

We believe oil markets may have entered the early stages of what we have referred to as a “super spike” period…. Resilient demand has caused us to revise up our super-spike range to $50-$105 per bbl…”

I don’t know about you, but a $55-a-barrel spread in their target looks like a ridiculous so-called forecast, even for a Wall Street firm. It’s big enough to float a semi-submersible drilling platform through.

After all, is the price target more like $50 or is it more like $105? Why $105 and not $103? Or $108 or $99 or $85?

And if it does go to $105, might not the world economies collapse and therefore oil collapse with them, and therefore might $50 be too high?

Still, The Market heard “Abbey says $100 a barrel crude,” and oil markets got a lift yesterday from what appears to me to be a late-to-the-party recognition by the Goldman Gurus that oil is a problem.

Marc Faber, on the other hand, has been warning of an oil spike for at least two years in the pages of Barron’s. And one full year before Abbey and the Goldman crew woke up and read the headlines, Feliz Zulauf, who along with Abbey and Faber is a Barron’s Roundtable jockey, said this:

The oil industry assumes a long-term price of $15 to $18 to calculate new projects for exploration and production. Because it is so pessimistic about prices, it is not developing new projects. That is one reason why we will run into an energy crisis in coming years. The other is that the size of discoveries peaked in the 1960s, with the discovery of Alaska's oil field. Since then, discoveries have been smaller and smaller. Sometime in this decade, oil will be $60 or higher per barrel.

Both Marc and Felix were dead right—early enough to help make people money. The Goldman Gurus, despite their sterling reputations, are late to the party, and probably wrong.

But with a $55-a-barrel spread in their so-called forecast, they’ve wisely given themselves plenty of room to be considered right no matter what happens, like all good sell-side analysts should.

Jeff Matthews
I Am Not Making This Up


Thoroughbred said...

I think you will come to find out that Goldman had a position they needed to close out on 3/31 and needed oil up at least in the morning to make a profit on the posn. The $105 call will turn out to be the same as the old tech price target calls we would get just before a secondary.

kevinmr said...

Hi all, first timer here. Jeff, I used to enjoy your work on

Sadly, I have found myself drifting closer to the "peak oil" crowd in sentiment. It seems likely the political arena will soon need to focus on energy usage and production and it's effect on our way of life. If the peak oil extremists are only half-right $105 may look like a bargain in 5-10 years.

The Unknown Broker said...

To Thoroughbred:

And how, pray tell, will we "come to find out" this bit of informtion?

Its_strange said...

Construction jobs grow in March , no ?

Thoroughbred said...

Well unknown moron, we will come to find out the same way we always do, a story in the WSJ (you do read don't you) or on CNBC (easier for you) in a short time.