MARKETWATCH FIRST TAKE Goldman Sachs and the oil bulls Commentary: Feeding frenzy as analyst predicts $200 a barrel By MarketWatch Last update: 2:27 p.m. EDT May 6, 2008 PrintPrint EmailE-mail Subscribe to RSSRSS DisableDisable Live Quotes SAN FRANCISCO (MarketWatch) -- Goldman Sachs has warned us: The wolf is once again lurking at the door, this time in the guise of $200 oil. This dire prediction scared crude prices past $122 a barrel in a flash Tuesday, marking yet another record in a market willing to believe anything that points to higher prices. See Futures Movers. We've seen this before. Goldman was among the first to cry "wolf" a year ago with their prediction of $100 oil. People called it alarmist at the time. But it happened, perhaps faster than even Goldman expected. There are far fewer skeptics now greeting their latest prediction, which Goldman handed down in a May 5 research note that predicts crude topping $150 to $200 a barrel within the next six to 24 months. Goldman tempers its stance with the caveat that predicting the "ultimate peak" in oil prices and the duration of the current upcycle "remains a major uncertainty." But having called it right once, a traumatized market is perfectly willing to believe the worst. And the worst, according to the note, means $200 oil before the end of the year. Of course, we need to take a critical look at the market itself to gauge the sincerity of its reaction. First of all, there are the underlying fundamentals of supply and demand. The world's appetite for oil is growing faster than new supplies are flowing to market, keeping upward pressure on prices. That's unlikely to change unless consumers dramatically alter their habits, which they almost certainly will if oil hits $200. But it still won't change the long-term trend, merely slow it down. Then there's the profit angle. Investors have been pumping money into commodities because it's the quickest way to make a buck in today's sluggish market. Equities, securities -- even real estate -- don't offer anywhere near the returns that commodities have this year. Goldman knows this, and they understand the power of greed as well as Newton understood the law of gravity. Oil traders also understand this. In fact, there's a saying commonly batted around the floor of the New York Mercantile Exchange and other futures markets: "Don't stand in the way of a speeding train." In other words, if the market wants to go higher, it will. Even if you're armed with the best supply-demand data in the world, standing behind fundamentals in a bet against market momentum typically turns your position into road kill. So when Goldman forecasts $200 oil in the not-too-distant future, who's going to argue? And given Goldman's best-in-class performance in the perilous subprime mortgage market, no one wants to bet against them, regardless of underlying market fundamentals.
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