Re Goldman Sachs
This article below refers to GS
It was in a mail out yest from Eureka
It's a great read ref. oil at the moment
Oil
If you think the US stockmarkets are highly volatile then spare a thought for those who are producing oil.
We are now learning that the hedge funds and investment banks have taken a monumental short position on oil. They reason that with China slowing and Iran sending oil to the market we are in for more falls and surprise, surprise, Goldman Sachs, along with one or two of its Wall Street mates, announced there was a good chance of oil falling to close to $US20 a barrel. As expected, before the latest rally, that statement pushed the price of black gold even lower.
Those with long memories will remember when Goldman Sachs last hit the big headlines with an oil prediction. In 2008 oil was trading around $US147 a barrel and Goldman boldly announced that it was likely to go to $US200 a barrel. Legend has it Goldman made a fortune from trading oil at the time. Whether that is true or not, the whole affair got mixed up with Lehman Brothers and nobody came out of it well.
The point is, with most of the investment houses having major positions in oil, you really can't believe them. Indeed, many believe that Goldman's statements signalled the top of the oil market in 2008 and the bottom last year. Meanwhile, most of the oil producers are getting heartily sick of Wall Street's antics and how they govern their profits.
Not surprisingly, Russia is establishing an oil marketplace, aiming to attract more and more oil contracts in roubles rather than US dollars. China is looking to do the same thing in its currency.
Russia is unlikely to have huge sway in the short term unless President Vladimir Putin pulls off his ambitious plan to set up a new oil cartel which will involve Russia, Iran, Saudi Arabia and Iraq, although a news report overnight suggested Iran will not participate in a deal.
As I have previously described, the Putin plan is a longer-term play that is linked to the settlement of the Syrian situation. Putin wants to link any Syrian settlement to the trade embargos in the Ukraine. To now he has not been anxious to push the plan too hard, preferring to bide his time and be in a stronger position in Syria, but an oil price below $US30 a barrel forced his hand. There are now preliminary discussions taking place among the four players.
One of the reasons oil has fallen so low is that the Saudis' plan to knock out US production quickly has failed. The Saudis believed that if they kept producing at high levels and the oil price fell, US high-cost producers would go out of business relatively quickly.
What the Saudis didn't know was that the US had sold half of their oil forward at the high prices. So the Americans continued to get strong revenue even though the price was falling. Most of those US oil producer hedge contracts will end in the current quarter and there is likely to be a big fall in oil production and a rise in bankruptcies.
With victory close at hand Saudi Arabia is reluctant to try and restore the price through production cuts but it is a very delicate balance, as the pain level for itself and its allies is now very severe.
And of course, sitting on the sidelines is this massive short position on oil. Some of the shorters are now becoming twitchy as they see talks taking place and are starting to cover their positions. This has caused the oil price to rise in recent days. The lift in the oil price could see more shorters begin buying back, resulting in further price rises. But once again it is trader-driven.
On the fundamental side there are substantial stocks of oil but production and consumption are not that far out of balance. If there are substantial production cuts, they will bring the oil price back quite sharply. Meanwhile ordinary investors are sideline observers in this situation.
FMG Price at posting:
$1.62 Sentiment: Hold Disclosure: Not Held
(20min delay)