Bullying the market

Goldman Sachs has lifted its target for oil prices to $75 per barrel (WTI). ‘Here we go again’, is what many among you probably think. You might even have some bad memories of the first half of 2008 when Goldman Sachs kept raising its oil price targets as the bull run was battering the market. Frightened by such a reputed institute talking about $300 oil, many energy consumers were scared into fixing energy prices at very high levels. As prices started to fall later in the year, this turned out to be a disaster. Victims of this false call now have to pay high energy bills in the middle of a severe economic downturn, and it hurts. That the market picked up the news of the new Goldman Sachs forecast again is a sign of the bullish mood that is momentarily predominating the oil markets. It also raises a chicken or egg questions: is the news picked up because of the bullish mood or is the mood bullish because of the news?

I really wonder why a reputed institute such as Goldman Sachs involves itself in the forecasting business (although that reputation is now somewhat less shining than a year ago). The longer that I follow the energy market, the more I get convinced that it is utterly impossible to tell anything about its future. The more I learn about the multitude of factors that influence it. How every time that you think that you understand some causality, a new causality pops up behind it. You find correlations in interpreting energy markets. But then these factors that the market is correlated to turn out to have a high degree of unpredictability of their own. If you simply look at the current market situation. Whether the price will continue to grow or not, will largely depend on the kind of economic recovery (or backlash?) that we will get in the next months. Who can tell for certain how firm the apparent start of a recovery is? Who can tell how much that fragile recovery would suffer if rising oil prices (like targetted by Goldman Sachs) would cause a new bout of inflation? I am convinced that many very smart people work at Goldman Sachs. But even with a busload of Einsteins I still consider it impossible to predict market evolutions. In June 2008, Goldman Sachs was talking about 200 dollar oil by the end of the year. They missed that target by 400%, so how much should we confide in them?

The trouble is that people do. The unpredictability of markets is what makes it so difficult to deal with them. It’s like driving a car without knowing whether it will drive 200 or just 50 kilometers per hour when you kick the gas pedal. Human beings try to bring order into the surrounding chaos by looking for causal relationships. And often, this works very well. When I jump off a roof, I can be pretty sure that I will fall down. But in markets, causality is too mishmashed for human brains to understand. Still, we like the thought of some sort of superbrain that is able to see through it all. This is the reason why financial scandals have occurred and will continue to occur. We like to think that someone like Mr. Madoff has discovered how it all works and can use this to beat the market. When somebody fixes prices because Goldman Sachs or some other authoritative voice says that the price will rise to this or that level, it is actually the same psychological process which is at work. There will always be a market for forecasting as there will always be people that believe that by thinking and analyzing deeply enough you can find out where the market is heading for.

This brings us back to the question why Goldman Sachs is doing this. They are known to be a huge investor in commodities in general and oil in particular. They make these investments for speculative purposes only. When the market is rising exponentially, like it did in 2007 – mid 2008, it is accelerated by speculation. It is institutions like Goldman Sachs that pour extra money into the market and this makes the prices rise faster. This makes it very conspicuous that they launch this sort of messages. They must realize that there are many people that tend to believe them, hence to buy to protect themselves against these forecasted higher price levels, hence to push prices higher to the predicted level. Are they trying to force a self-fulfilling prophecy? If this is indeed the case, we could compare their behavior to Opec’s. The oil producers’ cartel also makes a habit of launching forecasts of prices higher than the current level, in the hope that this will force the market to buy up to that price level. And when it has reached that level, they launch a higher level again. We could call this ‘bullying’ the market, forcing a bull trend. Reactions of consumer countries’ authorities make it clear that we consider this bullying to be improper market participant behavior. We can fly to Ryad to discuss that with the Saudi King, like Mr. Obama did, but we cannot stop it. But we can decide what a US-based bank like Goldman Sachs does. In the current climate anyone with some belief in the open market left over should beware af calling for politicians to regulate market practices, but still, I find it very curious that parties with such a big position in the oil market are allowed to make statements that clearly have such a big impact on other market participants.

Proponents of forecasting and speculators will retort that it is impossible to influence the market. They are partly right. It is true that if in the physical world supply is larger than demand, the price will ultimately fall. We saw that in the middle of 2008. But as Kobe has remarked on my entry called ‘The End of a trend’, demand was already higher than supply in the first half of 2008 and still the price was rising. And this was the moment when people like Goldman Sachs were launching so many forecasts that were clearly meant to feed the bull trend. I have been talking to the victims of this. I have been talking to the purchasing managers that decided to fix their 2009 energy prices at that moment. I have assisted companies in trying to find solutions for paying record high energy prices at a moment that the market for their own products is shrinking. I saw the needle and the damage done.

By uttering such ‘targets’, speculators are not only trying to force a bull run. I believe that they are also lying (bull-lying ;-). Because, if they would really know for which price the market is heading, they would have every interest in hiding this information from the market. It would namely be extremely valuable. Giving it away for free in the newspaper would be extremely stupid.

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