WHEN oil was heading up, Goldman Sachs forecasters famously prognosticated that a price of $200 per barrel would be obtained before the sun set on 2008. Not long after the air came out of the oil bubble, Goldman was overshooting madly on the down side. And now? Goldman Sachs analyst Jeff Currie is predicting a "swift and violent" recovery for the black stuff.If I have any regular readers, they'll take note that I was quick to play turnabout with Goldman's analysis in my post, "Time to Buy Oil". In response to discovering that they moved their target from $200 a barrel to $30 a barrel, I said:
So what does this teach us? My impression is that Goldman makes recommendations based on current momentum, and not accurate forecasting. After all, what is its excuse for not getting it right last spring?I suggested that, since analysts have just been so horribly wrong about everything over the past year, we might as well take Goldman's jump on the "oil downside" bandwagon as a sign that it was time to make a contrarian play and buy. It seems as though they took my criticism to heart, because instead of following the market, this time, they are actually making an honest-to-goodness prediction! (even if it is mine).
Of course, in the long term, they have to be right. After all, if oil prices remained this depressed for a long period of time, we would have to throw out "peak oil" theory and conclude that oil is not a declining asset. Useful declining assets should not be almost free.
So there are three possibilities: (1) Oil is not declining (maybe the market is pricing in the huge Brazilian find off the coast last year?); (2) Oil is being artificially depressed from forced sales by commodity speculators who need liquidity; or (3) this entire 80% drop in the asset price has been driven by demand destruction caused by the "depression." Common sense says that (1) and (3) are very, very unlikely. If (2) is the truth, then there should be a recovery once the speculators have been purged.
But I don't know if it will be a "swift and violent" recovery. I do know one thing: if I had an oil well in my backyard, I sure as hell wouldn't be selling that black gold now.