Introducing "The 3R": Why Goldman Thinks Oil Is Going To $82

It may not be Goldman's historic(ally wrong) "oil to $200 super-spike" call from the spring of 2008  which has so far top-ticked the highest price of crude in history, but in the grand scheme of things, Goldman's call from this morning was not that much different when the world's central banker incubator boosted its price forecast by a third and said global crude markets have probably rebalanced.

So now that the rebalancing narrative is over, Goldman needed a new, catchy narrative, ideally packaged in a handy mnemonic, ala "BRICs." It got just that in the form of, drumroll.... "The 3Rs", or "reflation, releveraging and reconvergence" which letters supposedly "reinforce our bullish overweight commodity outlook."

And not just bullish: "the most bullish in a decade on the 3Rs"

Here is the 30,000 foot summary behind Goldman's rediscovered commodity euphoRRRia, which the bank frames as follows: "The 3R’s unlikely to repeat 2008, but will likely rhyme in 2018."

Strong demand growth against limited supply growth due to OPEC and Chinese supply curtailments created significant reflation in commodity prices last year. During 2H17, commodities were the best performing asset class, posting a solid 18% return. Given the high level of debt held by commodity producers, not only do higher commodity prices reduce the number of bad loans and free up capacity on bank balance sheets, higher commodity prices also help strengthen EM currencies and weaken the dollar via the accumulation and recycling of rising excess savings. On net, this in turn lowers EM funding costs and leads to EM releveraging. More EM leverage leads to more EM growth reconvergence, reinforcing even more synchronized global growth and, ultimately, reflation pressures - creating a feedback loop. Our global Current Activity Indicator (CAI) is tracking 5.1% annualized real GDP growth, and as of last Friday (January 26) financial conditions in the US were the best ever recorded in the history of our Financial Conditions Index.

So based on what Goldman sees as an "increasingly supportive growth backdrop" the bank upgraded its commodity forecasts across oil, copper, iron ore and coal. The breakdown:

Given we have raised our 6-month Brent crude oil target the most, to $82.50/bbl from $62/bbl previously, we have front-loaded outperformance of the S&P GSCI and now expect returns of +15% and +10% over the next 6 and 12 months, respectively.  In addition, with low and declining inventories in key commodity markets, we expect commodity price volatility will rise from the current historically low levels.

Furthermore, Goldman is "also initiating a new 2018 top trade and recommending a long 6-month call option on the S&P GSCI excess return index struck 5% out of the money." With a cost of 2.3%, the breakeven is a 7.3% return with a 4.4 to 1 expected payout based upon our 6-month return forecast of 15%.

Translation: Goldman's prop desk is now aggressively selling commodity upside exposure to clients, which means that by definition, Goldman is turning bearish on commodities.

To be sure, it wouldn't be a catchy Goldman mnemonic if it didn't have its own "circular" chart to self-validate the U-turn in the bank's sentiment, so that's precisely what head Goldman commodity strategist Jeff Currie put together:

There are many more charts and justifications behind Goldman's mini "super-spike" call in the full note which we are confident readers can track down from their friendly, neighborhood Goldman salesman, but the best summary of what Goldman really meant, was in the following tweet:

Comments

zorba THE GREEK zorba THE GREEK Thu, 02/01/2018 - 12:42 Permalink

Either that or they have inside info that it is going to tank and they need suckers to take the other side of their shorts. It's a classic Goldman move. Privately let your few big crony investors in on the short, and publicly say you are bullish on oil prices. This shit is getting old with them. Anyone who believes Goldman Sack of shit, with all their evil history, deserves to lose money for not doing their due diligence.

In reply to by zorba THE GREEK

MK ULTRA Alpha zorba THE GREEK Thu, 02/01/2018 - 13:01 Permalink

Before the oil markets were speculator driven markets, but supply and demand caught up to this temporary control. Now the speculators led by firms like Goldman want back in, ignoring the supply and demand equation.

Russia wants out of the OPEC  production quota agreement because non-OPEC nations like the US are  taking global market share. Expect Russia to start historic pumping rates to compete for global market share.

When we look at the global market share taken by the US, most articles only count outside of the US, stating a percentage the US oil producers have taken. But the fact is, in 2008 time frame, we were importing 12.5 million barrels per day, that's down to 2.5 million barrels per day, so the US has taken a significant amount of global market share by supplying it's own crude oil requirements.

The repeal of the ban on US exports of crude oil has changed the speculator racket. It means the US can produce unlimited amounts of oil for the US and global market. Therefore, the supply and demand equation controls the global oil  markets, not speculators. US producers will pump more and more oil as the price rises. Supplying what the market will bare. The growing strength of the US oil industry, will keep prices down in the future.

Price increases that we're seeing at the pump have more to do with the weaker dollar, than supply and demand or the speculators. That's because global trade prices a barrel of oil in dollars.

AMERICA FIRST.

In reply to by zorba THE GREEK

Anonymous (not verified) GreatUncle Thu, 02/01/2018 - 12:40 Permalink

Pretty much - and if the conventional oil producers have a choice between a gold convertible Yuan OR a debased $USD? - I wonder what they will choose and I wonder how soon we get our next false flag after that happens ... since oil is in everything? - a 50% price increase probably won't be absorbed all that well in the USA.

In reply to by GreatUncle

adr Thu, 02/01/2018 - 12:43 Permalink

Another 20% in gasoline prices will give us the equivalent of $125 barrel.

It will also send premium gas to $4.30 ish and closer to $5 in PA.

 

Jack Oliver Thu, 02/01/2018 - 12:59 Permalink

Russia will be ‘giggling’ - Although Russia has plenty to laugh about already ! 

Considering the Zio/US slow motion ‘train wreck’ and America’s gross FUCKING incompetence - things are going extremely well for Russia !!! 

NoWayJose Thu, 02/01/2018 - 13:23 Permalink

Look closely at the oil ETF futures rollovers, and when oil related options and futures expire.  Goldman wants to be out of its leveraged long oil positions a couple days ahead of those dates.  

Typically lemmings jump in - as you see today - then the bottom falls out.  But maybe Goldman wants out before Nunes memo is out??

Ink Pusher Thu, 02/01/2018 - 14:20 Permalink

The bottom will be out of Goldman's bucket by the beginning of Q4 after OPEC and NoPEC 'JUST say NO' to extending the production caps. 

Goldman can keep buying their own stock, I hope they get shorted into oblivion.

LawsofPhysics Thu, 02/01/2018 - 16:28 Permalink

Talking about the "price" of anything in the absence of a mechanism for true price discovery is a fool's errand!

Jump right in there muppets!

"Full Faith and Credit"