Comm: Precious

(New York)

You do not hear Godman Sachs admitting that it made mistakes very often, but that is exactly what it is doing today. Goldman was not the only one to misjudge the direction of commodities prices this year, but according to the bank “this still leaves the question of how did we (and the market) get it so wrong?”. The bank says it misjudged some of the fundamentals of commodities pricing in making its forecasting error. In particular, it says that they underappreciated price differences in some “contacts”, which is a key driver of determining whether the market is under- or over-supplied.

FINSUM: We have been bearish on oil all year, and our own view is that banks completely misjudged the ability of OPEC to actually lower total global output.


After all the hype, the various rallies, and hopes for higher prices because of an OPEC oil price hike, a sad reality is gripping the oil business—it is back in a bear market. Oil prices have once again fallen over 20% from their most recent peak on February 23rd as OPEC cuts have failed to stem the supply glut that has overwhelmed the globe. The US shale industry and other non-OPEC producers have kept output high, which has offset any impact by OPEC and driven prices lower. US oil currently sits at just $43.23 per barrel. One oil commentator summarizes the bleak outlook, saying “We’re seeing this decline amid some major OPEC production restraints … That’s the huge difference” compared to previous bear markets.

FINSUM: The oil market is looking bleak because: 1. the world figured out that it had much more oil than it thought (thanks to fracking) and 2. OPEC no longer has a stranglehold on global production, which means the market is actually competitive.


OPEC has fallen from grace. Its exalted status has carried it for decades, but its power is now so deeply diminished that it cannot push prices up even with a large coordinated output cut. The group hoped its efforts to reduce supply would clear the glut from the market and raise prices along the way. However, its efforts have been undermined by growth in output outside of OPEC, such as from US shale. Because of this, crude stockpiles are remaining stubbornly high, showing that the oil market is not improving.

FINSUM: we have been saying this for months, but want to reiterate it—the structure of the oil market and the fact that the resource is abundant means there is an effective price ceiling on oil around $50.

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