Might. Or might not. The last authority on that IMO is an investment bank with no skin in the game.
If they really thought it’s true, they would trade on it themselves (they can now, really) or at least keep quiet about it and tell their top-paying clients privately.
I'm not advocating for or against GS here, but wouldn't an investment bank with no skin in the game be a bit more trustworthy? If there's no money on the line, there's no incentive/pressure to conform their analyses to their lines of business.
A few things. It's a big assumption to guess they have no skin in the game. They could and likely do have a net position one way or another in the oil market. There are a few ways that could work. They could both believe this is true, and also have a position in that direction. So publicizing this view might help their position realize gains sooner than expected. This is somewhat of an opposite to how short sellers work, where they will take a position then publish an expose.
But suppose they have no skin in the game. Is that necessarily better? It implies they don't know enough about the market to actually take a position, which calls into question the value of their research.
Of course both of these are huge simplifications. They ignore that GS is a huge organization, not a single person. As schizophrenic we people can be, corporations are that much more so. The left hand literally might not know what the right is doing. Who published this paper may not have authority to trade, or the ears of those who do. Or many other possible explanations.
Anyway, the general point is that disinterest and neutrality do not universally make opinions more reliable.
As big in both organizational size and managed volume as Goldman Sachs is (and as substantial and fundamental a portion of the global market as oil is), it's almost inconceivable that they wouldn't have any exposure in the oil market.
In fact, I'll bet that across the organization GS is currently holding multiple different (potentially mutually contradictory) positions in the oil market.
Except that, post Volcker, banks are prohibited from proprietary trading; and also except that there exist strong mandatory separations ("Chinese walls") between investment research and the investment banking and trading parts of banks.
Assuming they bought futures, "Goldman Sachs Futures Pte Ltd" is officially located in Singapore and Volcker Rule doesn't affect companies that are doing trades outside of US or makes trade decisions outside US.
Volcker Rule does affect banks that are controlled by US banks, but if Goldman did paperwork correctly (of course they did), beside the name similarity, you won't be able to link it with US Goldman.
GS is actually a bank holding company; I'm not sure what your comment is actually trying to say though - does it intend to contradict some part of what I wrote?
This is not necessarily the case, due to market spread. It's very easy to build a strategy that's consistently wrong, but by flipping the signs you will still be consistently wrong because of market spread.
Rules changes and investment banks cannot do prop trading now. Though I hear they changed again, quietly, and now they sort of can.
The point is, this is some analyst writing it. I’m sure it doesn’t go against the business and trading positions of GS, but it is some minor part of a big picture.
Overall, public analyst recommendation are pretty much uncorrelated with future returns.
I feel like it would be pretty hard for any investment bank to have no skin in the game. Many if not most of the companies in the stock market are affected by rising oil/energy prices.
Banks make money off fees for trading and loans (and complicated products that end up being a mix of the two). The recommendation business is mostly a marketing effort to drum up business. Their clients will be split roughly 50:50 on views on oil going or down. They don’t care. For every client losing money, another makes money too and has more money to spend on trading fees.
Banks used to be allowed to trade on their own accounts, but that was a massive invitation for abuse. This got at least massively scaled down, if not outright banned.
Sometimes investment banks do find themselves with an exposure they have to actively hedge; maybe they sold some complex product and it backfired on them, etc. But that’s rarer and a lot harder to game.
I'm not sure about that. High oil prices spur investment in extracting oil. In the short term it might reduce demand slightly (oil demand is quite inelastic) but long term it may have the opposite effect.
Consistent high prices spur investment. Price volatility encourages demand destruction (temporary through a reduction in use, long term through selecting alternatives). Without consistency, returns are unpredictable and capital investments will be directed elsewhere.
They don't redirect their capital investments elsewhere just because oil went from $72 to $90 and then back to $72. They just keep being oil companies, it's what they do. Most of them focus on hedging prices as best they can to deal with price volatility.
You said capital investment will be redirected elsewhere (where?). Your links disagree with what you said. The oil majors may restrain spending, they may cancel projects. They don't direct capital spending elsewhere. If oil prices are so low that they pull back on capital spending, they stop spending and cut costs in their operations, they don't redirect their spending. Wall Street redirects industry capital investment in that climate, oil companies do not.
You were talking about price volatility, which I referenced as oil going from $72 to $90 back to $72. What you're now suggesting wasn't mere price volatility, that was an extreme crash, caused by a brief global economic shut-down which sent prices to a multi-generational low. Which is why your links are so Covid era heavy in relation to that one-time event. That's like pretending WW2 is a common occurrence and projecting industrial behavior based on it.
If oil crashes to $20, Exxon doesn't redirect their capital spending elsewhere. They aggressively stop spending.
The oil majors all hedge price volatility. They're very used to dealing with price volatility. It's central to their business operations. What they don't do, is stop being oil companies, they don't redirect their capital investment to becoming farmers or car manufacturers or investing in tech companies just because the price of oil is lower by $20 or $30.
That is a good point, but I wonder how significant the effect really is. If you look at charts of oil prices for the last 20 years [1] vs US oil consumption the last 20 years [2], the only significant drops in either appear to be due to a) the 2008 financial crisis, and b) the COVID19 pandemic.
Therefore, it seems like demand for oil has been fairly inelastic to oil price, but instead is tied to the underlying rate of economic activity - AKA people drive less when they don't have jobs.
Now of course that was also because there was no significant alternative to oil as a transportation fuel. Today we have an alternative, so perhaps the volatility will manifest in a shift away from petroleum investment. Even on the consumption side, nearly everywhere in the US electricity is multiples less than the price of gasoline per vehicle mile driven, so it's a bit of an obvious change of fuel on an economic basis alone.
What makes you think fracking is not economically viable? The majority of the wells drilled in the US (by a large margin) are fracked. Fracking is very much an economical method for oil extraction right now, and is still viable at ~$50/barrel.
There’s even more opportunistic fracking when the price is higher, historically. A lot of wildcat fracking operations shut down when the price of oil drops.
While that's true, the era of wildcatter fracking being relevant to production in the US are largely over. The majors now entirely dominate the fracking segment and fracking-based oil production. They've gone on an acquisition spree across the past decade and tower over the smaller operators. All you have to do is look at the acres owned by the majors in fracking areas like the Permian vs small operators now (compared to the beginning of the fracking era).
Like this $9.5 billion deal the other day between Shell and Conoco. Wildcatters can't compete at these prices for the most part. They can't afford the real-estate now (in the early days when the industry was asleep and or skeptical they could).
The majors bring a more traditional, disciplined approach to pursuing cut-throat production competition or not and have a more consistent, less volatile schedule for capital investment. They're not as sensitive to medium size moves in oil prices when it comes to changing plans.
Sort of, in that it means people use less, and renewables become more competitive, but also not, because it makes fracking and more oil extraction profitable.
Well, yes, there's always some probability that a given individual will buy an EV or make some other green decision, and pressure from oil prices influences that probability. If you step back and look at population statistics then a ~2x price increase in petroleum will absolutely influence the green economy.
Most of us live somewhere where if the price of gas goes up, the price of electricity also goes up. We don't all have a nuclear powerplant supplying our home.
I think you're being sarcastic with this line of questioning, but at some price the answer is most certainly "yes."
Also, the car market is insane. $40k for a new vehicle isn't really that crazy _right now_ (especially for SUVs and trucks) and some folks are paying more for a used car than a new just to be able to get a vehicle immediately.
There is still a huge sector of car buyers who are buying these base model economy cars for $16000, or these rust bucket used cars for $4000. Those are the people most affected by their monthly gas bill going from $100 to $200. Not the people who can afford to buy or finance a 40k asset.
For sure, but I see a ton of SUVs and trucks on the road that cost a lot too.
> The average new-vehicle retail transaction price in December was a record $38,077, according to J.D. Power.
> That’s the price customers actually pay, after taking incentives into account. The average for trucks is above $40,000, analysts said.
> Light trucks accounted for a record 75.9% share of U.S. auto sales in 2020, up from 71.7% in 2019. In 2012, just eight years ago, trucks were 53% of the total.
Average price of a new car currently is $41k. When you consider the total cost of ownership of an EV (which costs half the cost per mile to drive versus a combustion vehicle) over five years, it sounds like a financially reasonable decision. Also, with interest rates so low, it would make sense to pay more upfront for the vehicle when the operating costs are lower.
Average price of a new car being 41k is the result of upmarketing. The economy class, your nissan versas, has been roughly the same price of ~16k for like 15 years. Considering inflation, that means these cars have actually gotten even cheaper relatively speaking. The people most affected by gas going up a buck are not the people who can afford a tesla, they are the people buying a nissan versa used for $6k and driving it until the wheels fall off.
If gas jumped up by a buck a gallon my family would swap out our gas car for an EV (albeit one much more affordable than a Tesla) instantly. We’re planning to make the switch but it doesn’t make sense financially right now because of current car and gas prices.
If gas prices went up significantly my electricity would also go up since my grid is pretty dependent on gas. Your financial model might get a little bit complicated when you factor in that potential increase too.
Kinda hard to save the environment when the whole economic system is devised for the people who save the environment and promote that stuff rely on oil to give them the goods necessary to continue with their work.
Only way we can reduce dependence on oil is if the government just shells out for us to move there. Otherwise the free market (regardless of oil price) will move there in a fraction of the time we should be.
The government can and does whatever they want with "your money" just like Amazon and Walmart do whatever they want with "your money." You have no say in it. The government is different in that it is a perpetual entity unlike the latter which theoretically is supposed to endure indefinitely. The fact that it's involuntarily funded is irrelevant. You have no say in what they do with your money unless you can somehow convince a mob to protest long and hard enough to get them to back down.
I would say that artificially high oil prices are. Taxes, cartels, and the like all help reduce total oil use. If the high prices are due to increased demand, then it’s just motivating companies to pursue further drilling.
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[ 3.0 ms ] story [ 112 ms ] threadIf they really thought it’s true, they would trade on it themselves (they can now, really) or at least keep quiet about it and tell their top-paying clients privately.
But suppose they have no skin in the game. Is that necessarily better? It implies they don't know enough about the market to actually take a position, which calls into question the value of their research.
Of course both of these are huge simplifications. They ignore that GS is a huge organization, not a single person. As schizophrenic we people can be, corporations are that much more so. The left hand literally might not know what the right is doing. Who published this paper may not have authority to trade, or the ears of those who do. Or many other possible explanations.
Anyway, the general point is that disinterest and neutrality do not universally make opinions more reliable.
In fact, I'll bet that across the organization GS is currently holding multiple different (potentially mutually contradictory) positions in the oil market.
Volcker Rule does affect banks that are controlled by US banks, but if Goldman did paperwork correctly (of course they did), beside the name similarity, you won't be able to link it with US Goldman.
> and "by 2008, eight investment banks accounted for 32% of the total oil futures market".
don't know the current state of affairs, but you can be sure goldman bought oil. in june. last year.
The point is, this is some analyst writing it. I’m sure it doesn’t go against the business and trading positions of GS, but it is some minor part of a big picture.
Overall, public analyst recommendation are pretty much uncorrelated with future returns.
https://markets.businessinsider.com/news/stocks/goldman-sach...
Banks used to be allowed to trade on their own accounts, but that was a massive invitation for abuse. This got at least massively scaled down, if not outright banned.
Sometimes investment banks do find themselves with an exposure they have to actively hedge; maybe they sold some complex product and it backfired on them, etc. But that’s rarer and a lot harder to game.
No, the oil companies will keep being oil companies.
Chevron, Exxon, BP, Aramco, KPC, NIOC, Royal Dutch Shell, PetroChina/CNP, Total, Rosneft, Petrobras, Pemex
They don't redirect their capital investments elsewhere just because oil went from $72 to $90 and then back to $72. They just keep being oil companies, it's what they do. Most of them focus on hedging prices as best they can to deal with price volatility.
https://www.reuters.com/business/energy/big-oil-keeps-brakes...
https://www.bcg.com/publications/2020/oil-and-gas-investment...
https://www.nsenergybusiness.com/features/oil-gas-spending-c...
https://www.ogj.com/general-interest/article/14201118/2021-c...
You were talking about price volatility, which I referenced as oil going from $72 to $90 back to $72. What you're now suggesting wasn't mere price volatility, that was an extreme crash, caused by a brief global economic shut-down which sent prices to a multi-generational low. Which is why your links are so Covid era heavy in relation to that one-time event. That's like pretending WW2 is a common occurrence and projecting industrial behavior based on it.
If oil crashes to $20, Exxon doesn't redirect their capital spending elsewhere. They aggressively stop spending.
The oil majors all hedge price volatility. They're very used to dealing with price volatility. It's central to their business operations. What they don't do, is stop being oil companies, they don't redirect their capital investment to becoming farmers or car manufacturers or investing in tech companies just because the price of oil is lower by $20 or $30.
Therefore, it seems like demand for oil has been fairly inelastic to oil price, but instead is tied to the underlying rate of economic activity - AKA people drive less when they don't have jobs.
Now of course that was also because there was no significant alternative to oil as a transportation fuel. Today we have an alternative, so perhaps the volatility will manifest in a shift away from petroleum investment. Even on the consumption side, nearly everywhere in the US electricity is multiples less than the price of gasoline per vehicle mile driven, so it's a bit of an obvious change of fuel on an economic basis alone.
1. https://www.macrotrends.net/1369/crude-oil-price-history-cha...
2. https://www.statista.com/statistics/264825/oil-consumption-i...
Like this $9.5 billion deal the other day between Shell and Conoco. Wildcatters can't compete at these prices for the most part. They can't afford the real-estate now (in the early days when the industry was asleep and or skeptical they could).
https://www.shell.com/media/news-and-media-releases/2021/she...
The majors bring a more traditional, disciplined approach to pursuing cut-throat production competition or not and have a more consistent, less volatile schedule for capital investment. They're not as sensitive to medium size moves in oil prices when it comes to changing plans.
Also, the car market is insane. $40k for a new vehicle isn't really that crazy _right now_ (especially for SUVs and trucks) and some folks are paying more for a used car than a new just to be able to get a vehicle immediately.
> The average new-vehicle retail transaction price in December was a record $38,077, according to J.D. Power.
> That’s the price customers actually pay, after taking incentives into account. The average for trucks is above $40,000, analysts said.
> Light trucks accounted for a record 75.9% share of U.S. auto sales in 2020, up from 71.7% in 2019. In 2012, just eight years ago, trucks were 53% of the total.
https://www.forbes.com/wheels/news/2020-truck-suv-car-sales-...
Only way we can reduce dependence on oil is if the government just shells out for us to move there. Otherwise the free market (regardless of oil price) will move there in a fraction of the time we should be.
Would 12.5 percent more salary not be a huge shift for you?