Goldman Goes Long WTI

Goldman's David Greely is no Tom Stolper. In fact his recommendations have been correct more often than not. Which is why we believe that when the market learns that the Goldman commodities strategist just opened a long September WTI position at $107.55, it will merely provide that extra oomph to send WTI up, up and away. Or maybe not: this could be another one of the "fade Goldman" calls. Alas, with the real impact of the recent $2 trillion balance sheet expansion becomes truly felt we have a distinct feeling Goldman is quite right on this one. Evil, evil speculators.

From Goldman's David Greely:

Repositioning our trade recommendation as Brent crosses $120/bbl

 

Brent crude oil prices have rallied $11.92/bbl this month, crossing our 3-month target of $120/bbl and reaching their highest levels since last spring. While we continue to see an upward trajectory for crude oil prices, we believe that with Brent prices having crossed our 3-month price target it is an opportune time to reassess our trading recommendation and we believe that the better trading opportunity may currently lie in WTI futures for the contract months following the scheduled June reversal of the Seaway pipeline to flow crude oil from Cushing to the US Gulf Coast. Brent prices have risen above our 3-month target, but we expect them to continue to rise to $127.50/bbl over the next 12 months

 

We continue to expect Brent crude oil prices to rise further this year in order to restrain demand growth, keeping it in line with available supplies. Further, we see the risks to our forecasts as skewed to the upside as world oil inventories have not been building despite Saudi Arabia pumping at its highest levels in 30 years and Libyan supplies returning to the market. This suggests that the increased supplies have been absorbed by the market and leaves the world in the unprecedented situation in which OPEC spare capacity is at a trough rather than at a peak just as the world economic recovery is getting on a more solid footing.

 

Taking profit on our long July 2012 Brent trading recommendation with a potential gain of $13.19/bbl, and opening a long September 2012 WTI crude oil futures trading recommendation

 

The Seaway pipeline is scheduled to be reversed in June to flow up to 150 thousand b/d of crude oil from Cushing to the US Gulf Coast, increasing to 400 thousand b/d by early next year. With the Seaway flowing crude from Cushing to the US Gulf Coast, we expect WTI prices will be closely tied to Brent prices, with WTI likely trading at a $3-$5/bbl discount, reflecting the pipeline tariff economics. Consequently, we expect that WTI prices for the contract months following the reversal of the Seaway will move upward with Brent prices over the next 12 months. However, because these WTI contracts continue to trade at a substantial discount to Brent, we believe they have additional upside from the narrowing of the WTI-Brent spread that we expect following the reversal. For example, the September 2012 WTI-Brent spread is trading at $11.28/bbl, whereas on a 6-month horizon we expect the WTI-Brent spread will narrow to $5.00/bbl.