It is the favourite trick of investment banks to set their own forecast so that they can be “surprised” when data misses come about. They all use it to manipulate price action to benefit their trades. A nice example is Goldman in the oil market today.
The pre-Easter OPEC was bearish for prices as OPEC drips back 1.1mb/d and Saudi Arabia relaxes its 1m/bd unilateral oil cut over the next three months as well. Moreover, US oil rigs are now clearly responding to price stimuli:
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Remember that huge productivity gains in shale oil mean fewer rigs are needed for the same volume of output each cycle. More to the point, despite Goldman selling the line for months that US shalers would be slower to respond to higher prices this time around, they are coming back online at precisely the same speed, meeting my expectations.
But not so for Goldman which found that it was all so very price bullish, not for any objective reason, but because the data was more bullish than its own forecasts:
OPEC+ has agreed to ramp-up production gradually in coming months. While the increase comes a month sooner than we had expected (May vs. June), the June and July increases are smaller than we had assumed, for a net similar cumulative ramp-up through July. Finally, Saudi Arabia will start reversing its unilateral cut in May by 250 kb/d, consistent with our assumption.
We forecast a larger rebound in oil demand this summer than OPEC and the IEA, requiring an additional 2 mb/d increase in OPEC+ production from July to October in our view. Even if nudged by the US administration, this is still a tall order for a group of producers that has cut drilling by 50% over the past year. Importantly, we expect a normalization in excess inventories by this fall even with such a large ramp-up and, as a result, reiterate our view that the recent sell-off is a transient pullback in a larger oil price rally.
Taking a step back, today’s decision points to a still cautious and orderly ramp-up from OPEC+, still allowing for a tight oil market this market.
Meh. This is pennies in front of the steamroller stuff. The backwardation of the curve at $60 Brent is a clear indication that US shale oil is still the marginal price setter for global oil. Its rigs are ripping back, contrary to the Goldman view.
As well, OPEC supply discipline is starting the break with cheating certain to accelerate as Saudi unwinds its clamps on the market.
There is still 10-12mb/d of production offline dumping horseshit all over the “structural” deficit thesis. Supply shortfalls as demand recovers will be measured in weeks. Libya is charging back and Iran is coming next. Both undermine Saudi credibility.
There may be oil value stocks out there that you like the look of but let me warn on that as well. Like miners, the time to sell is generally when forward P/Es are low because they have priced in big earnigns growth from high prices. The time to buy is when P/Es are high because commodity prices are so low.
The oil market may have some upside left in it. But the vast majority of the recovery from zero is over.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
