[Micki]

Article in SeekingAlpha suggests that the recent reweighting in Goldman Sachs energy index could be the result of plummeting production.
i.e. the algorithm used to calculate the commodity index is automatically adjusted down with falling production thus effectively hiding the possible fact that oil production has peaked.

SeekingAlpha The article also contains an interesting link to G/S site describing how the commodity index is weighted.

[DantesPeak]

Interesting story. I posted the NY Post story about the GS realignment of commodity indexes the other day.

It appears that GS and maybe some others large brokers are using the downward momentum from the new weightings to panic the market lower. They appear to have succeeded.

Business media sees what has happened to the price of oil, and says it is due to rising inventories, and doesn't even look at he manipulations behind the scenes. But the complete opposite inventory story is true - US oil/product inventories fell 70 million barrels in the fourth quarter. The IEA doesn't have its 2006 figures yet, but previously stated the OECD countries would lose 200 million barrels in the six month period from October to March. They may be revising that inventory drop to a higher number based on what we see in the US, combined with downturns in OPEC, Russia, and Mexico oil production levels.

[seahorse]

Very interesting. If GS ties the weightings of their investments to production, maybe this is an early indicator of peak oil. The GS information certainly explains the recent drop in oil prices, which, classic supply/demand balance can't explain.

[MrBill]

The GSCI cuts its weighting in crude products when the switch from HU to RBOB took place. It roughly cut its weighting in half due to the conversion. I think 174.000 contracts, but I am not sure? That number just sticks in my head.

In any case, we have not hit peak oil production, yet. Global demand is approximately 85 mbpd and the supply cushion is about 2.5 mbpd in 2007 up from 1-2 mbpd in 2005-06, which is causing rising inventories and spot prices to plummet. Forcing OPEC producers to cut production or face further gluts.

Also resource nationalization that results in under investment in oil producing assets and infrastructure in places like Mexico, Venezuela, Bolivia and Russia may equally be to blame for any below 'potential' production shortfalls. Of course, with prices falling at the moment that may not be an immediate problem, but in the long run it will matter a lot.

For example using natural gas to desalinate seawater in the desert is not a very intelligent policy, but also selling gasoline domestically for as little as 10 cents a litre does little to encourage conservation.

The DBC factsheet also gives some information that should be of no surprise to the commodity index investor. The performance table shows 1 year returns as of September 30, 2006 of 9.32% for the DB Commodity Index, (minus) -21.14% for the GSCI and -6.11% for the DJ-AIG Commodity Index.

Is Commodity ETF Slicing and Dicing Necessary?

Since September crude prices are a lot lower. A lot. Hurting GSCI 'long only' index, which is 70% weighted in energy!

GS has been one of the most bullish houses on the street and have been forced to cut their price forecasts for crude twice already this year in response to falling prices. I guess they are mere mortals afterall?

[oilluber]

does anyone have any info on this, why the energy component
of the index was reduced last week and the subsequent crash of
oil futures ??

I don't have any facts on this.... anyone ??

any cause and effect here ??

The energy bulls have had their heads severed in just 2 weeks.

[seahorse]

"I find your lack of faith disturbing."

Darth Vader

[oilluber]

"I find your lack of faith disturbing."

Darth Vader

referring to what ??
the GS people and the US government ??

[DantesPeak]

oiluber: check this out:

Wither the Oil Price

[TreebeardsUncle]

Hi.
The speculators are bailing, led by the big institutional investors, because anticipated gains have not antipated largely due to the lack of an intense hurricance season, a warm winter, and a relaxing of geopolitical tensions. In fact oil prices are about where they were a year ago. Expect their to be a good buying opportunity soon. Still think that investing in oil rig servicing companies is the way to go.

[NEOPO]

Goldman Sachs





and as of 1/11/2007:
Goldman Sachs Commodity Index (GSCI®)

about 1/3 the way down.

Energy 67.58%
Crude Oil 32.16
Brent Crude Oil 14.06
RBOB Gas 1.64
Heating Oil 6.51
GasOil 4.72
Natural Gas 8.50

[seldom_seen]

Two words: volatility.

Ok that's just one word, yet oil is the single most important commodity of industrial civilization. A civilization predicated on stability, predictability and control. When oil prices bust out of their cage and start running in all different directions like a chimpanzee on angel dust. It's not a good sign.

Oil may go down to 40 and be up at 90 within the next six months?
That's an economical earthquake.

[NEOPO]

AUGUST 2005 - ENERGY 77.51%

Thats 10% in 16 months.
I am having a hard time finding anything earlier then 2005.
This is the same place that holds Cheney's money in Vangaurd funds.

[Micki]

The topic is also discussed here:
G/S reweighting result of PO(?)
That thread is based on an article suggesting that the reweighting is the result of dropping production.
It does have a link to GS page where you can find out more.

[Dreamtwister]

If the big players like G&S suspected that there were a "significant number" of contracts that would not be delivered over the next... let's say 2 years, wouldn't that be a good reason to bail before those contracts were violated?

I know *I* wouldn't want to be stuck holding a worthless piece of paper come the delivery date. If I had reason to believe there would be no delivery, I'd be reducing my energy holdings as fast as humanly possible.

Just a thought.

[Dreamtwister]

Blatant crosspost to follow:

If the big players like G&S suspected that there were a "significant number" of contracts that would not be delivered over the next... let's say 2 years, wouldn't that be a good reason to bail before those contracts were violated?

I know *I* wouldn't want to be stuck holding a worthless piece of paper come the delivery date. If I had reason to believe there would be no delivery, I'd be reducing my energy holdings as fast as humanly possible.

Just a thought.

[coyote]

Two words: volatility.

I agree. We knew this was gonna happen. It's just been rather slow and majestic to start with. Think it'll speed up?

[MrBill]

Blatant crosspost to follow:

If the big players like G&S suspected that there were a "significant number" of contracts that would not be delivered over the next... let's say 2 years, wouldn't that be a good reason to bail before those contracts were violated?

I know *I* wouldn't want to be stuck holding a worthless piece of paper come the delivery date. If I had reason to believe there would be no delivery, I'd be reducing my energy holdings as fast as humanly possible.

Just a thought.

I know we all love to be paranoid around here, but somethings just go too far. An investment bank like Goldie Sachs does not have the capacity to take physical delivery of crude. They are paper players only.

Secondly, the GSCI is not their own money per se, but an index that investors buy. Those individuals also do have the means to accept physical delivery of crude either.

The WTI benchmark for example is a light, sweet crude, and as we know the oilfields in Texas have been in decline for 30-years now. Therefore the spectre of physical delivery is in any case remote. But if you really thought oil was running out in one or two years then, yes, you would want to take delivery.

There is an ancient maxim in commodity trading. The first thing you have to learn. The shorts always have to come to the longs. Commonly known as the short squeeze.

However, with crude plummeting at the moment, there is obviously no shortage. That means the shorts are making money and the others are long and wrong. I am quite happy to sell at $75 and buy at $50 all day long. Peak oil or no peak oil.

At some point we will rally again, but the irrational long speculator has been spectacularly punished so far in 2007!

A lot of peak oilers are simply in denial at the moment. They were in seventh heaven as prices pushed higher and higher, but now that they have reversed they simply have not come to grips with the new reality. Prices have slid 33% from their highs last year and you can make just as much money on the way down as on the way up.

[MrBill]

I got this from Goldie Sachs themselves.

Goldman Sachs Commodities Research
January 12, 2007

Recent price action inconsistent with commodity index reweightings


Commodity index reweightings have been inconsistent with recent price action across the commodity complex

The increased price volatility across the commodity complex since the start of the year has generated substantial attention on the reweighting of commodity indices that takes place in January of each year. Although the 2007 commodity weights have been public knowledge for several months, implementation of the 2007 weights has taken place this week.

A review of the commodity index reweightings reveals that the shifts have been inconsistent with recent price action across the complex. Specifically, if index reweightings were a key driver behind the recent price action, the result would have been shallower declines (or even outright increases) in those commodities that had received relatively higher weights. However, this has not been the case. In particular, WTI crude oil has declined the most of all the commodities, despite the fact the index reweightings should have lent support to WTI relative to most of the rest of the complex.

Oops.

[Jack]

Moved to Current News. Jack.

[jdmartin]

(Fortune Magazine) -- Crude oil prices hit a series of record highs in the past month, topping $83 a barrel - and that was after OPEC announced it would increase production by 500,000 barrels a day. The sharp spike went against post-Labor Day tradition, when the end of a gas-guzzling summer usually brings lower prices, and refineries head into their fall maintenance schedule.

After Goldman Sachs raised its year-end price forecast by $13, to $85 a barrel, Jeffrey Currie, global head of commodities research in London, spoke to Fortune's Eugenia Levenson about where oil is headed from here.

What's behind the recent surge in crude oil prices?
The OPEC supply increase was too little, too late. The market is in a significant deficit, the first deficit we've seen since 2003. Inventory started to drop in October of last year for two reasons. Non-OPEC supply has been extraordinarily disappointing, because those producers are hitting technical difficulties with new equipment and their existing fields are getting less productive. OPEC has the supply but hasn't brought it online. The second factor is that we're in the part of the energy cycle where extraction costs are rising and have been since 2001.

So how high will prices climb?
Our high-risk scenario is in the $90 to $95 a barrel range. I think there's high probability we'll get there, rapidly approaching 50%. The later OPEC is in responding to the higher prices, the sharper the deficit and the more critical the drawdown on inventory this winter - and the more volatile the price spikes. They'll have to respond by first quarter of next year, barring a global collapse in demand.

Why hasn't OPEC increased supply?
First and foremost, domestic demand is strong in the entire Gulf region. Exports from the Middle East are lower today than they were in 2000, but production is up two million barrels a day. There are serious bottlenecks preventing non-OPEC from growing supply even at $70 per barrel, so if I'm OPEC, I know I don't have significant competition for market share. The last reason, which is very important, is that if OPEC did ramp up production, they'd go to capacity, which would reduce their political negotiating position.

Interesting...