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Goldman Call to Sell Oil Sets Up Buying Opportunity: Traders

If investors follow Goldman Sachs's advice and cash out of oil, it likely will be only a short-term trade that sets the stage for another buying opportunity.

A commodities trader at the New York Mercantile Exchange.
Photo: Oliver Quillia for CNBC.com
A commodities trader at the New York Mercantile Exchange.

That at least is the view from the trading pits, where the Goldman call Monday was greeted with a level of skepticism, even if it’s short-term ramifications saw an appreciable dip in the energy trade—and, in fact, across the commodity spectrum—on Tuesday.

“The ‘music’ stopped suddenly yesterday and panic set in as everyone began to look for a chair into which to sit, and there were far too few of those available,” hedge fund manager Dennis Gartman wrote in this “Gartman Letter” Tuesday regarding the Goldman aftermath. “The doors were locked; panic set in.”

However, Gartman said underlying technicals in the trade suggest that joining the selling frenzy could be a mistake.

His reason: While energy fell broadly, Brent crude continued to perform more strongly than its West Texas Intermediate counterpart. The trend has held true since geopolitical disruptions in the MENA (Middle East and Northern Africa) region drove a 20 percent spike into oil prices. Though it’s not historically the case, changes in oil demand have made Brent more of a factor in the impact from energy prices.

But the Goldman call coupled with modestly encouraging news out of Libya that strongman Muammar Gaddafi was preparing a peaceful handover of power to drive down prices more than 3 percent.

In short, the oil bears seemed to be relying on a good dose of what has become derisively known as “hopium” to keep energy prices in check.

“Such an accord may well be reached (in Libya), and that may well put severe downward pressure upon crude oil prices, but until we see material narrowing of the Brent/WTI crude spread the trend for Brent at least shall remain upward and weakness is still to be bought there while strength in WTI is to be sold,” Gartman observed.

Popular as the buy-the-dips strategy is in the equity markets, it’s likely to be a prevailing theme on the commodity floors as well.

The lack of any real catalyst to boost the US dollar value anywhere in sight would seem to put a floor beneath any commodity trade.

“If the dollar was strong and the fear premium was coming out, we could go down substantially further,” said Todd Horwitz, chief strategist at the Adam Mesh Trading Group in New York. “But as I look at the economy and the dollar, we’re still going to see some action.”

To be sure, oil fell even as the dollar Tuesday continued its virtually unabated plunge, though the greenback weakness was less than it’s been in recent sessions.

But Goldman tied its projection to an overabundance of longs that is making the trade top-heavy.

By that measure, some pullback, and subsequent buying opportunity, would be expected.

Bank of America Merrill Lynch, for instance, reiterated its longer-term bullish outlook on oil, projecting that crude even could test its all-time high of $147 and at least a rally into the $120 range for WTI.

“I would be a little cautious about getting short this market,” Addison Armstrong, director of market research for Tradition Energy, said in a CNBC interview. “Every pullback has been a buying opportunity for the bulls.”

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