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Goldman’s Last Top Trade For 2016 Bites The Dust As Oil Prices Soar

Oil prices were not one of Goldman Sachs’ six main calls for this year, although the firm’s analysts see more risk for downside based on their call for $20 to $40 per barrel. This call now seems at riskā€”less than a week after the highly reputable investment bank scrapped the sixth of its top calls for this year.

Indeed, this highlights just how volatile the world’s markets have been because even Goldman is having difficulties making predictions about what’s going to happen this year. No wonder the U.S. Federal Reserve is so uncertain right now as well.

Goldman abandons sixth top call

In a report dated March 8, Goldman Sachs analyst Charles Himmelberg said they abandoned the last of their six top calls for this year on Friday after ditching five of them in January and February. The call they closed out on Friday was a long position on their basket of 48 non-commodity exporters and short of 50 emerging market banks stocks. They established that call on Nov. 19 at 1.12 with a 3.9% gain.

The five calls they closed out last month include a long position on the U.S. dollar against an equally weighted basket of the euro and yen, which they opened on the same date at 100 with a possible loss of about 5%. They also shut their long on 10-year breakeven inflation in the U.S. on Jan. 18 after opening it on Nov. 10 at 1.6% with a 2% target and a stop on a close lower than 1.4%. The potential loss on this call was 21 basis points

Goldman closed their long on an equally-weighted basket of the Mexican peso and the Russian ruble versus a short on an equally-weighted basket of the South African rand and the Chilean peso, which was opened on Nov. 19 and closed on Jan. 21. The entry level was 100, and the potential loss was 6.6%, including carry, Himmelberg said.

They closed their call on a long on five-year five-year forward Italian sovereign yields versus a short five-year five-year forward German yields on Feb. 9 after opening it on Nov. 19. The entry level was 160 basis points, and the stop loss was 190 basis points. As of the close of trade, the spread sat at 219 basis points with a potential loss was 49 basis points.

The final call they closed earlier this year was a long on large cap U.S. banks through the BKX Index compared to the S&P 500, which they closed on Jan. 11 with a potential 5.4% loss.

What does this mean for the oil prices call?

Himmelberg also highlighted that WTI oil prices have climbed by almost 45% after bottoming out in early February, and high-yield spreads have also rallied with a 184-basis point tightening. He added that both of these are the biggest three-week rallies since 2011. He noted that the evidence indicates that the correlation between oil prices and the credit market is still strong, but his colleagues in the Commodities team think oil prices could fall.

oil prices

The reason the Goldman Sachs team doesn’t think oil prices will be able to hold at current levels approaching $40 a barrel is because they think the prices are “self-defeating” and thus probably won’t last very long. They noted that there’s a lot of supply in the world’s oil markets. He noted that just last week, the big inventory build in the U.S. was a symptom of an “oil market that is still in a large surplus.

oil prices

However, oil prices have “rallied hard,” he added, and said that prices that go much higher than where they are now will “dilute the economic and financial incentives to reduce supply.”

Goldman’s team clearly falls in the fundamental cap as their expectation that oil prices can’t be sustained at current levels runs counter to the view of technical analysts.