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Schork Oil Outlook: Goldman Fallout and Energy Futures

Stephen Schork, Editor, The Schork Report
Monday, 19 Apr 2010 | 10:38 AM ET

By now our readers have likely heard about and discussed the SEC’s lawsuit against Goldman Sachs for fraud. The details are across the Internet, but what effect will the allegations have on the energy complex?

As trader and analyst Stephen Schork discussed with a VP from JPMorgan on CNBC, Wall Street is bullish for oil in the long term due to supply concerns. To hedge their exposure to the complex, word on the street is that traders have been long oil and short natural gas.

But if banks like JPMorgan, Citi and Goldman Sachs have to build a defense fund for fines levied by the SEC, will they liquidate this trade, i.e., sell crude oil and buy natural gas?

Given the secrecy regarding trades, it is hard to quantify this assumption.

But as the Chart of the Day in today’s issue of The Schork Report illustrates, when Goldman Sachs had a large risk appetite and money to spare (think early 2008), funds were funneled in to the liquids. When the subprime crisis spread to the rest of the economy, and banks were forced to reduce risk and liquidate capital, commodities fell soon after.

  • Oil, Natural Gas and RBOB Gasoline Futures

According to the CFTC report, traders on Tuesday of last week were already decreasing their net length in crude oil, while natural gas producers are approaching the point where they would buy natty on the market. Heavy selling pressure on the crude complex, and an influx of buyers for natural gas set the stage, and the allegations against Goldman Sachs could be the nudge required to push the market in to a severe correction in the short term.

As with natural gas’s 4.000 magnet, Nymex WTI prices last week refused to drift too far from 85.00. Prices seemed likely to end the week slightly higher until the Goldman Sachs news hit on Friday. Thus prices closed the week 2.0% lower at 83.24, and prices remained well within The Schork Report’s (81.16, 88.86) Confidence Interval (CI).

With the contract for May delivery expiring in two trading days, the CI has tightened to (81.10, 75.44). A breakout below or above here will lead the June contract to either end of our (78.32, 91.54) CI. The odds look good that the bears will at least initially have momentum.

On the other hand, our upper CI is statistically possible but realistically the bulls will have a very difficult time breaking through 88.00 let alone 90.00, especially with their star player (sorry JP Morgan) held back by the SEC. Volatility last week rose from 27.2% to 31.4% and we expect it to continue as the May approaches expiry.

Further out, the average CI for 2010 remains little changed from (75.07, 101.61) last week to (75.57, 100.27) this week, implying that a temporary stumble for the bulls will not hold them back for long.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.

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