April 13, 2011

Goldman Sachs Claims to be Bearish on Oil

Goldman Sachs Bearish on Oil and Stock prices
I felt compelled to blog on conflicting messages coming from what are 2 of the largest Banks in the United States. First, lets start with Goldman Sachs. They recently released their views on oil and advised their clients to sell as oil had become "overpriced." Immediately when I heard this, I was very suspicious of Goldman Sachs intent on making this call. First off, If you want your clients to sell oil and oil related companies, you tell them only! Not make a statement that will be carried far and wide by the press and most likely acted upon by the public. I am holding an oil company, and did not "sell" as Goldman Sachs was suggesting investors do, and as a matter of fact, I expect the price for the barrel of oil will continue to rise with minor corrections along the way. I think Goldman Sachs has some of its old trick up its sleeve as advising the sale of oil now, seemed suspicious and made me immediately begin thinking about a possible alternative motives for Goldman's advice to clients to sell oil. One day later, Bank of America advised clients: oil prices will rise, buy oil.

It is known for example, that Goldman Sachs has recently been shrouded in controversy. One example that comes to mind in regards to misleading investors and shady practices on creating and marketing certain securities for sell, is the Abacus deal. Essentially, Goldman created a mortgage backed security for one of their major clients. This client was going to bet against the value of the security. The client was hedge fund manager, John Paulson. Mr. Paulson even picked out some of the underlying mortgages that were pooled to make the securities in the Abacus deal. All Mr. Paulson needed, was to someone to take the opposite side of his bearish bet on these particular securities. This is where Goldman comes in, they sold the asset to a German bank IKB. After the security lost most of its value, Mr. Paulson cashed in, winning on his bearish bet (where he profits if prices go down). The IKB
Goldman Sachs helps Hedge Fund Manager Profit from Housing
bank however, claimed Goldman did not disclose the risks nor the fact their client helped construct the Security that he than bet against. Mr. Paulson is an enigmatic Hedge Fund Manager who made Billions on his bet against the housing market. Goldman Sachs let him bet on instruments they sold to investors who were long on housing! Long story short, Goldman Sachs is not the most Virtuous firm in the world. They are filled with deceit and tricks. This call on oil I believe is just another one of those occurrences. Why make it widely known their position on oil and then advising their clients to sell oil related companies or oil future contracts. Here are several scenarios of why Goldman might have done this:

1) They are holding a large short position and getting people to sell in mass, pushes the price down further (benefiting a short position)

2) Ultimately they really felt oil might go up in the near term, so making statements that gets the public to sell in mass, could then provide Goldman Sachs with a potentially attractive buy price for oil and oil related companies.

3) They really are bearish on oil now, but that doesn't explain why they didn't tell their clients only (if their clients are selling along with the public, the price goes down even faster, and the selling execution price may not be attractive.

Bank of America Bullish on Oil

Bank of America Bullish on oil
The very next day, Bank of America announces they are bullish on oil and made recommendations to buy it now. Now things are getting a little confusing. Goldman says Sell oil, Bank of America says Buy Oil - What is really going on here? That was a rhetorical question! I fully support the notion of doing your own research. Don't wait on the so called "experts" to tell you what you should do. A lot of people do, and look at the conflicting opinions of two of the largest banking powerhouses in the world. Just for kicks, I'm going to embed the Company ConcocoPhillips in this post. This company is in the Oil & Gas Integrated Industry. I have followed it for 9 months now. I'll follow up in a couple weeks to see where we stand for this company (April 12th closing price was $77.16). It's my belief ConocoPhillips, and oil Prices both go up.

ConocoPhillips 5 day Stock Chart

Yahoo Article on Oil Prices

Following Goldman Sachs' negative call on crude prices which took the wind out of the commodities rally this week, Bank of America Merrill Lynch is predicting a 30 percent chance that Brent crude could hit 160 dollars a barrel in 2011.

"Commodity prices should move broadly higher in 2011 on robust economic growth in emerging markets, despite relatively weaker growth in developed markets," said Sabine Schels, a commodity strategist at BoA Merrill Lynch in London in a research note.

"With oil demand expanding rapidly and Libya production down by at least 1 million barrels per day, we forecast (the) Brent crude oil price to average 122 dollars a barrel in the second quarter, and believe prices could briefly break through 140 dollars in the next 3 months," she said.

Given the risks from the situation in the Middle-East and North Africa, Schels says there is a chance the price could go even higher over the next 2 months.

"Under our upside risk scenario, Brent prices could average this year between 125 dollars a barrel and 160 dollars a barrel," Schels said

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