May 27, 2011

Fadel Gheit Throws Wall Street's Big Banks Under The Oil Speculating Bus

By EconMatters

Public Relation people at Goldman Sachs can not be too happy about this.

Fadel Gheit, a veteran of Oppenheimer and oil and gas industry dating back to the Mobil era, went on record and called the Big Banks--Goldman Sachs. along with Morgan Stanley--out on manipulating the oil market during a Bloomberg TV interview on May 25.

Both Goldman Sachs and Morgan Stanley published notes on Monday, May 23, to clients recommending taking a long position on Brent crude oil. Specifically, Goldman boosted its year-end target for Brent by 20% to $120 per barrel from $105 and its 2012 forecast to $140 from $120. Goldman also raised its three-, six-, and twelve-month Brent price target to $115, $120 and $130 a barrel respectively.  Morgan Stanley raised its 2011 Brent crude price forecast to $120 per barrel from $100 a barrel, and its 2012 forecast to $130 from $105. 

Although the firm was not mentioned in the Bloomgerg interview, JP Morgan also reiterated its forecast that Brent should reach $130 a barrel by the third quarter of 2011. 

Remember Goldman was the one telling clients on Monday April 11 to liquidate "CCCP” commodities basket for a 25% profit, which partly prompted a broad selloff in commodities including crude oil.  Furthermore, at the time, Goldman said Brent would correct towards $105 a barrel in coming months.

So this flip flop just short six weeks later not only contradicted some of the macroeconomic projections of Goldman itself, but also prompted a fire storm of criticism even from its peers.  (Morgan Stanley at least has been consistent with its commodity bullish position.) 

I'd imagine Goldman's surprise bear call in April probably threw a lot of investment houses under the bus as most of them are consistent in their long commodity call, and most likely invest and advise clients accordingly. 

Here are some notable quotes from Gheit (clip below at about 3-minute mark):
“...They can invent reasons why oil prices go to $130 or $150, but history has shown that these people are able to move markets. It is not Exxon or BP or Shell that moves the oil markets. It is the financial players. It is the Goldman Sachs, the Morgan Stanley, all of the other guys. It is a shame on the government that allows them to get away with that.”
“It is not illegal. All banks need to make a profit. The M&A business is not doing too well. Therefore, they need to improve their profit outlook and commodities has been the area where they make a lot of money. Commodity speculation is now a big driving force in Wall Street."
"Why did they [Goldman Sachs and Morgan Stanley] control hundreds of millions of barrels of oil if they cannot refine or mine?  Because it is legal and they can get away with it. As long as they make a profit, that is fine. Basically, the consumer will pay the price. The economy will slow down because of the few that will make a huge amount of profits.”
"[CFTC] has absolutely done nothing. They talked about this for three or four years. Nothing happens. Nothing changes and I think nothing will change. Any changes will be cosmetic because financial institutions have a lot of clout and the financial lobby is very strong. Much stronger than the oil lobby.”
Now that's a punch that packs a wallop and tells it like it really is pointing squarely at the real bigger fish than the three small companies and two oil traders that CFTC (Commodity Futures Trading Commission) is suing right now.

Further Reading - $80 Oil By September: When Fundamentals Smack Big Banks in the Face


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