Fadel Gheit Throws Wall Street’s Big Banks Under The Oil Speculating Bus


By EconMatters

Public Relation people at Goldman Sachs can not be too happy about this.

Fadel Gheit, a veteran of Oppenheimer and oil and gas industry dating back to the Mobil era, went on record and called the Big Banks–Goldman Sachs. along with Morgan Stanley–out on manipulating the oil market during a Bloomberg TV interview on May 25. 

Both Goldman Sachs and Morgan Stanley published notes on Monday, May 23, to clients recommending taking a long position on Brent crude oil. Specifically, Goldman boosted its year-end target for Brent by 20% to $120 per barrel from $105 and its 2012 forecast to $140 from $120. Goldman also raised its three-, six-, and twelve-month Brent price target to $115, $120 and $130 a barrel respectively.  Morgan Stanley raised its 2011 Brent crude price forecast to $120 per barrel from $100 a barrel, and its 2012 forecast to $130 from $105. 

Although the firm was not mentioned in the Bloomgerg interview, JP Morgan also reiterated its forecast that Brent should reach $130 a barrel by the third quarter of 2011. 

Remember Goldman was the one telling clients on Monday April 11 to liquidate “CCCP” commodities basket for a 25% profit, which partly prompted a broad selloff in commodities including crude oil.  Furthermore, at the time, Goldman said Brent would correct towards $105 a barrel in coming months.

So this flip flop just a short six weeks later not only contradicted some of the macroeconomic projection of Goldman itself, but also prompted a fire storm of criticism even from its peers.  (Morgan Stanley at least has been consistent with its commodity bullish position.) 

I’d imagine Goldman’s surprise bear call in April probably threw a lot of investment houses under the bus as most of them are consistent in their long commodity call, and most likely invest and advise clients accordingly. 

Here are some notable quotes from Gheit:

“…They can invent reasons why oil prices go to $130 or $150, but history has shown that these people are able to move markets. It is not Exxon or BP or Shell that moves the oil markets. It is the financial players. It is the Goldman Sachs, the Morgan Stanley, all of the other guys. It is a shame on the government that allows them to get away with that.”

“It is not illegal. All banks need to make a profit. The M&A business is not doing too well. Therefore, they need to improve their profit outlook and commodities has been the area where they make a lot of money. Commodity speculation is now a big driving force in Wall Street.”

“Why did they [Goldman Sachs and Morgan Stanley] control hundreds of millions of barrels of oil if they cannot refine or mine. Because it is because it is legal and they can get away with it. As long as they make a profit, that is fine. Basically, the consumer will pay the price. The economy will slow down because of the few that will make a huge amount of profits.”

“[CFTC] has absolutely done nothing. They talked about this for three or four years. Nothing happens. Nothing changes and I think nothing will change. Any changes will be cosmetic because financial institutions have a lot of clout and the financial lobby is very strong. Much stronger than the oil lobby.”

Now that’s a punch that packs a wallop and tells it like it really is pointing squarely at the real bigger fish than the three small companies and two oil traders that CFTC (Commodity Futures Trading Commission) is suing right now.

(Bloomberg interview clip is available on our blog.)

Further Reading$80 Oil By September: When Fundamentals Smack Big Banks in the Face

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Dian Chu

3 Responses

  1. Dollar says:

    Well J D, you kinda wrong.

    The CFTC already has two classes of traders, with different rules for each. There are physical traders, who actually use or produce oil. That could be oil companies, could be chemical companies, anyone who uses oil. Both users and producers can hedge.

    Then the speculator class of investor has different trading rules. I can not tell you the difference in rules.

    Very basically, speculator class are necessary because they provide liquidity and make hedging possible for physical traders.

    The fewer traders involved, would add to volatility and increase the risk of the market being manipulated. Larger trading volume makes it more difficult for one or a small group of traders to move the market. And there are not enough physical traders.

    The NYMEX raised margins ( as did the CME on agricultural commodities ) about a month ago. And to my knowledge, no one can tell much difference, if anything, its become more volatile.

    If you could go to the NYMEX trading floor today, and talk with those actually in the pits, you would get a variety of opinion on the impact of speculation on prices. Or the impact of changing margins or reducing the number of speculators.

    The one thing you would find agreement, is increasing transparency.

    I thought it was very interesting that Rex Tillerson told Congress a couple weeks ago, that he thought speculation accounted for $30 per bbl of the price. But producers will always blame speculators for high prices or prices they think are too low. The Saudis have been doing this for years.

    But then, when all five CEO’s of the major oils that Congress on the carpet to flog, were asked where oil prices were headed, they said WTI would be $125 by the end of the year.

    Soooo, are these guys basing that on what they think speculators will do to the price ?? Or was that on supply/demand ?

    The price of oil is what it is.

    All the above said, commodity trading is extremely complex and not for amateurs like me, if you wanna get a taste of that, follow this blog


  2. J D says:

    The solution is pretty simple, large investors in crude futures have to register as a “hedger” (end user) or a “speculator” (trader).
    When they deal in these futures contracts they get to use margins, which means they may only have to put up maybe 10% of their contracts value to control these contracts. If you really want oil to be priced at the true value make the speculators put up 100% of their contracts values in cash.
    The more skin they have in the game the less you see the wild swings in price. The flip side of this is some people who are heavily invested in funds that trade crude futures will take a hit by not getting these inflated profits.
    This is the way I understand it. I am sure someone will correct me if I am wrong.

  3. Dollar says:

    It was also Goldman Sachs who told their clients oil was going to $200 in late 2008, and it went to $30 .

    The question becomes, does GS move markets, or are they just good ? It becomes a chicken/egg thing.

    I do agree though, that the oil companies have nothing to do with the movement of oil prices, its totally out of their hands. OPEC has some play, however.