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Goldman’s Oil-Trade Reversal: Puzzle for Investors

You know, a guy could get suspicious. Goldman Sachs reversed its commodity stance this week, particularly on oil and copper, a mere six weeks after reporting the huge headwinds of demand destruction, declining China growth and moderating Middle East and North Africa strife.

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From setting a Brent crude target of $105 dollars, the London commodity team led by Jeff Currie has reversed course and set three-, six- and 12-month targets on crude of $115, $120 and $130 respectively.

Wait, what?

And more than this, it has reiterated their slowing growth and further monetary tightening thesis for China, where all the marginal barrels are expected to go for the next several years, making this reversal one of the least easily understood and frankly illogical calls I have seen from the investment bank in years. You know, a guy could get suspicious.

Independently, Morgan Stanley also released a note Tuesday, recommending a fresh long position in crude oil, but it has been much more consistent in its views, without the waffling, quick trade price targets of the Goldman note. (Click for the author's buy-in price ceilings on three key energy names.)

Of interest are the places where the two powerhouse oil trading firms meet in their projections.

The most important are in projections for spare OPEC capacity, which both firms remain convinced are the only swing barrels available and necessary to take up any demand slack for the next several years.

Morgan is absolutely convinced that all available spare OPEC barrels will be called upon as early as the fourth quarter of this year, a certainly dire prediction that would indicate that crude under $100 is a gift buy we shouldn't miss.

Well, let's at least take one more look before we push all our chips in.

I have three quick ideas why the time may be not quite ripe to get in on the oil trade just yet, despite the collective agreement of the two most powerful investment banks in the oil world.

First, the end of QE2 (the Fed's quantitative easing) is rapidly approaching and much of the commodity trade has undoubtedly been fueled by the "free"-money ability of traders to invest in the commodity space.

Getting in at this point on oil without knowing exactly what form any additional easing will take is like standing under a twine-suspended anvil.

Second, if China is the real demand growth engine for oil, and everyone agrees that it is slowing and tightening, how can anyone really want to be long oil, particularly after the quick ripping that the oil market has taken in the last month?

And third, the shape of the oil curve alone is incredibly daunting. For example, the price of crude 12 months forward is barely more than a dollar higher than where it is selling today in the front month.

Wait, what? If the marginal barrel was really under so much pressure, future prices should be running at a much, much higher premium (or contango) than this. In fact, the contango was more like $8 to $10 dollars as the market practically doubled from under $70 to over $115 in the last 12 months.

Indeed, a deep contango is a terrific indicator of higher prices. This flat curve doesn't look promising.

Value in Energy Stocks:

There's some value to be had in some energy stocks down here, but I prefer to pick away at them this summer instead of pushing all in right now on a commodity correction that Goldman assures us is over.

Some drillers, particularly Weatherford are worth accumulating under $20 and some integrated stocks like Exxon Mobil under $80 and Chevron under $99 would be worthy of a punt.

Or, you could just jump up and buy and buy big. After all, the bullish call is coming from Goldman. For so many people, that's all they need.

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TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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Disclosures:

TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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