Thursday, August 18, 2005

The Goldman Gurus Do It Again


Goldman ups U.S. long-term oil forecast to $60—Reuters.

One of the top news stories of the morning seems to be word that the Goldman Sachs oil gurus have raised their long-term U.S. price forecast for next year to $68 a barrel, up from $55, and determined that oil prices will stay above $60 for the next five years.

Crude oil prices are, of course, trading up in Europe on the Goldman call, the first rise in four days.

Back in March, readers will recall, Goldman did much the same thing, calling for “a ‘super spike’ period” for oil and noting that “Resilient demand has caused us to revise up our super-spike range to $50-$105 per bbl…” (See The Goldman Gurus: Two Years Too Late, April 1.)


That "super-spike" forecast came after Goldman had for years maintained an entirely consensus view of oil prices (in January, strategist Abbey Joseph Cohen had told Barron’s Roundtable “we’re pricing $28 a barrel oil into Goldman earnings estimates”) despite the fact that oil had hit $55 and refused, under any circumstances, to break below $40.

The day after the Goldman Gurus called for “$100 oil,” as the Street interpreted the ridiculously broad $50-$105 “super-spike” target range, oil hit $58 a barrel and then fell for seven straight weeks before touching bottom at $47.

In other words, the Goldman Gurus—in the grand tradition of Wall Street analysts everywhere—threw in the towel at precisely the wrong moment. Anybody who bought crude on their “super-spike” call stood to lose nearly 20% in seven short weeks.

And today we have, I believe, a similar situation.

Oil prices stubbornly refused to do anything else but keep rising since the May 20th post-Goldman “super-spike” bottom—up 30% from that low—and now appear to be at a high-end-of-the-range level. Thus, to me, Goldman’s newer, higher forecast looks once again to be marking a near-term peak.

I still believe the world is running short of oil; that oil companies need to spend far more on new exploration and development and far less on buying back their own shares than they’ve been doing; and that the remarkable complacency exhibited by most economists (until quite recently) towards the imbalance between oil supply and oil demand has been misplaced.

But when the Goldman Gurus make another headline-grabbing and largely irrelevant oil forecast after a 30% run, it’s more than likely that we’re in for another short-term correction.

This time the Goldman Gurus look to be about two months too late.


Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

12 comments:

Cody Willard said...

Jeff, credit due, as I recall reading your call for $50 oil back when it had a $2 handle.

Still gotta give GS some props too, as oil has indeed been pretty much in their trading range since they made that call.

I'm short XLE.

Alex Khenkin said...

Cody, no wonder - GS's "trading range" was so wide one could drive a Hummer throught it. Never mind that oil dropped out of their range almost immediately, for weeks. It's like predicting between 5 and 20 inches total snowfall in New Hampshire in Feb.
On the other hand, they published their "forecast" on Mar 30th, as I recall, and predicatably it caused a short spike. Could there have been a suffering long position that needed closing before the quarter-end, one cynically asks?
-Alex
http://smallinvestorchronicles.blogspot.com/

SrGuapo said...

Not defending Goldman by any means, but I suspect none of you read the 50-105 report. It didn't reference a target, it referenced what could happen in an increasingly probable series of events. The media never really seemed to get that and now everyone just quotes the headlines.

bpl1000 said...

As I stare out of my window watching a congested FDR, I can't fathom why anyone would want to be stuck in that mess. Yet, day after day, that highway slows to a crawl. And still yet, with pumps approaching $3 a gallon, that same highway looks as congested as it did when crude was $40 a barrel.

jwoodywild said...

Well said bpl. Here in Atlanta--home of the countries longest average commute time, the highways that are already 8 lanes in EACH direction are still virtual parking lots starting at 3:30pm---and there is no end in sight to the population growth and the invariable lane widenings that will occur. And oh yeah, gas here--the cheapest gas in the nation because of no taxes--is nearing $3 a gallon also.

Do you want to know how high gas prices can go? To me the answer is simple. Just find the price in your mind that, on a per gallon basis, would cause you to dump your car for mass transit, form a carpool, or buy a more fuel efficient car. Here in Atlanta, my sense is that its at least $5 per gallon, minimum. And even then I think you would just see more "tele-commuting"--and improved commute times for the rich whose gas will be just another corporate expense.

market crasher said...

GOLDMAN IS THE MOST OVERRATED WALL STREET FIRM EVER. WHENEVER I TRADE WITH THEM I CROSS MY FINGERS THAT THE TRADE GETS DONE WITH MINIMAL DAMAGE. AS FAR AS RESEARCH, I GUESS YOU CAN SAY GOLDMAN IS ON PAR WITH ALL THE OTHERS... THE 100+ CRUDE SPIKE FORECAST CALL GOT DEATH THREATS FROM WHAT I HEARD. THE RECENT CALL WON'T GET PEOPLE CALLING PERIOD. TOTALLY EDGELESS. CONSIDERING ENERGY SENTIMENT IS SKY HIGH, I WOULD FADE GS'S CALL.

Prudent Investor said...

You have to look at the basic assumption that GS is basing on for its oil target, namely, strong aggregate demand. As fas as I'm concerned, isn't strong aggregate demand in 06 another assumption, if so, how could one recommend people what to do on assumptions, a future one, nonetheless. Right now, almost all economist, CEOs and Fed officials are calling 3% GDP growth to the eternity. Just look up your history and read that during 1931 summer, virtually all persons in control of big institution were bullish on the economy and had rubbed off the effects of 1929 crash as history. The bottom of the market didn't arrive until summer of 1932 and the bottom of the Great Depression wasn't reached until 1933. So, I don't know where oil will be in 2006 but if I were to bet using aggregrate demand, I would bet lower.

jsx_2099 said...

Help a rookie out - oil futures are at $60, China, India are growing - everyone is buying new cars and more of them and most of you think that oil will go lower? I'm thinking that it will only go up - am I stupid or missing the big picture?

cdub said...

It's not just about the number of cars on the roads, but where the money is spent. True, it may take $5+/gallon to affect driving behavior, but it's very possible that $3/gallon alters spending behavior. More $$ on gas = less $$ on other items. But I do believe that the 'crisis' is overblown - supply of oil and the development of alternative technologies will be more than enough to drive the price back down.

Alex Khenkin said...

jsx_2099,
it may go lower, or higher - it's all just speculation (in all meanings of the word). The future prices of assets are unknown. Remeber the US$ that "could only go down" in December? Or the very same crude in 1999 that also "could only go down", as "fundamentals for oil are terrible"?
-Alex
Small Investor Chronicles

Sith Lord said...

Jeff,

It is very clever of you to diversify your interests so you do not appear to be doing my deeds full time. The global shortage of oil is important but it is HARDLY as important as Overstock.com.

I am the SITH LORD and I DEMAND that you get back on target.

Target is Mr B.

Feel the dark side of the force.

Sith

http://mrbssithlord.blogspot.com/

Seth Lord said...

Sith,

All is forgiven, please come home.

Seth