On February 22, Jeffrey Currie and the commodities team at Goldman Sachs initiated a long trading recommendation on WTI crude at $107.55 a barrel.It’s been a rough few weeks for anyone who took that advice – oil closed out this past trading week at $91.48, down 15 per cent from the time of the recommendation as uncertainty in Europe has stoked fears of a significant slowdown in global growth looming ahead.
In their latest note, the Goldman analysts assert that “the extent of the recent sell-off was largely unwarranted” given supply and demand catalysts in the oil market on the horizon. Here is their reasoning:
The supply of oil actually available to the market is increasingly constrained by the inability of Iran to market its oil owing to the effects of US and European sanctions. More specifically, Iranian crude oil was forced into floating storage at a pace of up to 900 thousand b/d in April. Without this Iranian crude oil, world oil supplies just about kept pace with world oil demand in April. This suggests that as the sanctions – and in particular the difficult to insure tankers carrying Iranian crude – shut increasing amounts of Iranian crude oil out of the world oil market, the supply available to the market will likely fall and the market supply-demand balance will fall back into deficit, drawing on oil inventories once again.
Goldman is asking clients to sit tight and wait it out until oil prices point back to the upside in the coming weeks and months.
We asked MercBloc president Dan Dicker, a veteran trader with more than two decades of experience in the oil markets under his belt and a recent book credit on the subject, for his reaction to the Goldman note.
Dicker was surprised – he said he would have expected Goldman to wait a few more weeks before “doubling down” on the long recommendation, given what is happening in Europe right now. He said he was “not a seller here,” but at the same time thought it was still too early to be long as well.
Aside from the situation in the eurozone, another big reason for concern, according to Dicker, is the recent rumblings about a possible Strategic Petroleum Reserve release, which would flood the market with extra supply and has the potential to send prices tumbling even further. This is worrying traders who are looking to position on the long side.
An SPR release directly following a sharp sell-off in oil markets is a page right out of President Obama’s own playbook. Indeed, the timing of the president’s decision last summer (which was only the second time in history that a U.S. president drew on the SPR) coincided with a precipitous decline in oil prices and was seen by many as a punctuated move by the administration to really drive the message home: stay out of the way of falling oil prices or be crushed on the long side.
This weekend, President Obama convenes with other G8 leaders to discuss a range of international issues, and one of them is tapping the SPR. Per Reuters:
G8 leaders at this weekend’s summit at Camp David in Maryland will discuss a “range of options” to address oil market strains, Tom Donilon, Obama’s top security aide, told reporters. The Japanese news agency Kyodo reported on Wednesday that Obama would urge leaders to support plans to release reserves. A diplomat said the topic will likely be part of an energy discussion on Saturday.
Goldman is known for its influence in oil markets, and they are encouraging clients to get long. Even so, significant headwinds working against their thesis could be right around the corner.
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