Goldman Sachs rocked oil markets for a second day Tuesday by calling for a nearly $20 fall in Brent crude oil, saying speculators had pushed prices ahead of fundamentals.
It was the second warning of a steep market reversal from the long-term commodity bull in as many days, after it recommended clients close a trade on Monday heavily weighted toward U.S. crude futures.
Oil prices have shed around $6 a barrel since Monday's open. Traders and analysts said the bank can have an out-sized influence on commodities, given the insight and reach of its global trading arm J. Aron and history of being one of the first banks to predict $100 oil last decade, in March 2005 when prices were closer to $50 a barrel.
Goldman Sachs chief energy analyst David Greely said the recent run-up in prices, in which Brent rallied as much as 33 percent since the start of the year, looked overdone.
"While prices are back at levels of spring 2008, supply-demand fundamentals are significantly less tight," Greely said in an April 12 note emailed to clients.
"We believe that the market will experience a substantial correction toward our $105 a barrel near-term target for Brent crude oil in coming months," he stated.
Brent crude for May fell $3.06 to settle at $120.92 a barrel. The May Brent contract expires on Thursday. U.S. May crude fell $3.67 to settle at $106.25.
"Goldman are the 800 lb gorilla in this market," said Matthew Bradbard, trader and portfolio manager at MB Wealth Corp in Hollywood, Florida.
"What they say tends to happen, and traders know this. After central banks and governments, Goldman are number two. Their releases are the next thing traders look for ... they're a big player with a strong track record," he said.
Goldman analyst Greely said that while unrest in the Middle East and North Africa remains a risk to oil markets, with Libyan exports already largely cut off, the price had been pushed too high by the large number of speculative traders currently long crude oil.
"Both inventories and spare capacity are much higher now and net speculative positions are four times as high as in June 2008," Greely said.
Goldman estimated in a research note on March 21 that every million barrels of oil held by speculators contributed to an 8 to 10 cent rise in the oil price.
As unrest spread in North Africa and the Middle East, investors accumulated the equivalent of almost 100 million barrels of oil between mid-February and late March on top of their existing positions, adding approximately $10 to the 'risk premium,' Goldman said.
Using Goldman's estimates and data on speculators' positions from the U.S. Commodity Futures Trading Commission, the total speculative premium in U.S. crude oil is currently between $21.40 and $26.75 a barrel, or about a fifth of the price. The UK's Financial Services Authority (FSA) does not publish trader data on Brent.
"If Goldman is running to the exits in a commodity run, then everybody is running," said one Texas natural gas trader. "It's just like someone yelling 'fire' in a theater."
The bank had previously been one of the most circumspect about the level of spare capacity held by members of the Organization of the Petroleum Exporting Countries (OPEC), saying just five months ago the world's buffer supplies could be wiped out by growing demand by the end of 2012.
The Paris-based International Energy Agency said on Tuesday sky high prices were beginning to dent energy demand growth, but still said consumption is likely to rise by 1.4 million barrels per day this year, and tight supplies remain a concern.
Goldman also recommended in its note that clients close long positions in the ICE gas oil contract, used for hedging — and speculating on — diesel and other distillate fuels. The bank now has no published recommendations for clients looking to bet on higher oil prices.
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