Ultimately, Goldman says the market — including the bank itself — violated three fundamental rules of commodity investing.
First, trying to price in future developments in commodity markets is often self-defeating.
In the case of oil, traders took long positions on the view that the oversupplied market would swing from surplus to deficit nearly four to seven months before that undersupply was expected to materialize, Goldman explains. The rise in prices, fueled by traders taking long positions, allowed U.S. drillers to pump more, which delayed the very rebalancing traders were banking on.
Second, the market traded speculatively beyond oil's supply cycle. The rise of U.S. shale has shrunk that cycle to six to nine months, but in December, investors went long on oil futures dated 12 months into the future.
"When Dec-17 reached $57.50/bbl, this created a significant return opportunity for US producers to hedge, together with an unprecedented ability to ramp up supply," Goldman said.
Last, investors started making bets on the view that the market would flip into backwardation, a state in which spot prices are higher than future prices. But they did this before stockpiles actually fell, and since then, global inventories have fallen more slowly than expected.
According to Goldman, "such backwardation without stock draws wasn't sustainable."
Goldman said it believes the market has now realigned and, following the core rules, it is now safe to go long on oil again.