Sunday, November 22, 2015

Goldman says oil going to $20/bbl -- so it probably will not do that!

This morning GS in a E&P report said that the current glut in oil could easily drive prices to $20.00/bbl. Nine times out of ten whatever GS says doesn't happen!  Take gold, it's rather amazing, although GS has a 2012 US$ 850 target (when it was trading at $1,300), today it's trading at US$1077.00/oz -- so not a very good prediction (it did make the cover of the WSJ).

So why is GS so often wrong?  

The short answer is that GS, like all brokers, is looking at generating "buzz" for their ideas.  The real issues are the following:
  1. There is a glut of oil with virtually all storage options full
  2. Lots of investors played the yield curve assuming that oil prices would rise -- it didn't
  3. New production in the US "non-conventional" is dropping fast -- drilling rig count is down 60%
  4. Other stuff that's worrying:  overall demand for trade is off, freight rates (ships) is down 70% in a month (that cannot be good)
So the signs are not good for oil, but they are not the "end of the world either".  GS's point is valid that weak oil prices seem to be here to stay a bit longer as the world economy slows further.  Not sure that the recent attacks have much to do with overall economic growth, but its certainly not going to help.  

So for all the hedge funds and private equity funds that went long oil as a sure thing, the big unwind is about the begin.   Any good trader (ok ok) will eventually kill a losing trade.  So that will add additional pressure on oil prices, its a great opportunity for the US government to build its strategic reserves (assuming they've not done so already).

Anyway, for Canadians, oil prices are as low as they've been in nearly a decade.  So there's that

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