+

Cookies on the Business Insider India website

Business Insider India has updated its Privacy and Cookie policy. We use cookies to ensure that we give you the better experience on our website. If you continue without changing your settings, we\'ll assume that you are happy to receive all cookies on the Business Insider India website. However, you can change your cookie setting at any time by clicking on our Cookie Policy at any time. You can also see our Privacy Policy.

Close
HomeQuizzoneWhatsappShare Flash Reads
 

Anyone Who's Sticking To This Goldman Energy Trade Is Totally Getting Crushed

Feb 21, 2013, 01:48 IST

Mario Tama/Getty ImagesLast week, Bloomberg's Grant Smith reported Goldman Sachs' is sticking to a year-long call that the price differential between the Brent and West Texas Intermediate crude oil indices would narrow to $7.50 in the second quarter and $5 in six months.

Advertisement

But in the past year, the gap has only widened, and now stands at about $18 — here's the chart, with Brent in red and WTI in blue.


"Goldman Sachs insists they are right and the market is wrong," Stephen Schork writes.

In a new note, Schork says that if you stuck with Goldman's recommendation, then you're probably down about 50 percent on your investment.

Advertisement

Here's how he explains it:

The June 2013 Brent/WTI spread averaged minus $12.24/b last August, when Goldman was telling clients to sell the spread (sell Brent at a $12.24 premium to WTI). However, by November the spread hit minus $17.95/b. Last month the spread had regressed back into – what our friend Dennis Gartman dubs as… The Box – i.e. the Fibonacci 50/62% retracement area from minus $12.98 to minus $11.80. Thus, if you stuck with this trade you had to sustain a 47% mark-to-market decline in capital before you got back to breakeven… only to then watch half of your equity evaporate over the last month.

And he sees no reason to think Goldman will eventually be vindicated.

The lynchpin of the trade was the expansion of the Seaway pipeline running from Oklahoma to the Gulf, which was supposed to boost WTI prices by relieving Oklahoma's supply glut. In other words, it was supposed to close the spread. We wrote about this a few weeks ago.

Advertisement

But now the company responsible for Seaway is saying the pipeline is not able to process the mixture of light and heavy crudes that have accumulated.

As a result, Schork says, the future of the Brent/WTI spread — and Goldman's call — remains seriously murky.

You are subscribed to notifications!
Looks like you've blocked notifications!
Next Article