Who profited from Goldman Sachs’ $105 oil price scare headline?

Arjun Murti moved the entire stock market today.

Murti is the Goldman Sachs managing director who made waves by indicating $105 per barrel as a possible oil price. AP via NYT:

Stocks sagged Thursday, ending a lackluster quarter in negative range as investors weighed rising U.S. incomes and consumer spending against lofty oil prices, which rose following an investment bank’s suggestion that energy was in the early stages of a bull market.

The report from Goldman Sachs warned oil was entering a “super spike” period that could drive prices as high as $105 per barrel, but many on Wall Street were skeptical about the call. The only thing that could take crude to such high levels would be a major disruption in supply from Iran, Iraq or Saudi Arabia, which seems unlikely at this point, said Tracy Herrick, chief economist for the Private Bank of the Peninsula, in Palo Alto, Calif. The report seemed to have an impact on trading, nonetheless; crude futures surged $1.41 to $55.30 per barrel on the New York Mercantile Exchange — difficult for stock investors to ignore.


Oil, however, was in the spotlight once again after Goldman researcher Arjun Murti said “oil markets may have entered the early stages of…a ‘super spike’ period,” described as a multiyear timeframe during which oil prices shoot up high enough to reduce consumption and create extra capacity, “only after which will lower energy prices return.”

Reaction to the report varied. Michael Guido, director of commodity strategy at Societe Generale, said refinery-capacity issues and rising demand from China are solid fundamental reasons to expect crude prices to continue rising, and that $105-a-barrel oil was not “unrealistic.” Scott Meyers, a trading analyst at Pioneer Futures, said the report was “irresponsible.” To forecast crude prices of $105 is “a little over the top,” he said, since it can send shockwaves through the market.

$105 a barrel is a very provocative number, and the phrase “super spike” is no less provocative. We have a lot of questions about Murti’s analysis, since there is a very important difference between the 1973 and 1979 oil spikes and where we are today; namely, we no longer have the ridiculous domestic oil price controls in place that distorted the market back then. Arguably, oil prices might not have risen so much on those prior occasions if American consumers were not receiving the false price signals arising from the controls.

But that is an academic discussion for a different day. The management of Goldman Sachs would understand that the “super spike” mention of $105 a barrel would be a market moving event. In the era of Ken Lay, Marrtha Stewart, AIG and on and on, would it be too much to ask what oil futures positions the firm held as Murti made his prediction?

We refer you to an article from 2002 by Rebecca Byrne in The Street.com called “Goldman’s Luster May Be Fading.”

For a long time, Goldman had largely escaped the criticism that Merrill Lynch (MER:NYSE – news – commentary – research – analysis), Citigroup’s (C:NYSE – news – commentary – research – analysis) Salomon Smith Barney and Credit Suisse First Boston (CSR:NYSE – news – commentary – research – analysis) had received for their investment banking practices. Yes, New York state attorney general Eliot Spitzer included Goldman among the Wall Street firms he was investigating. But Goldman has been burnishing its image as “different” in the past few months — a little cleaner than its rivals — and the efforts had been successful.

Then came the revelation late Wednesday that Goldman doled out coveted IPO shares to executives at 21 companies and may have engaged in “spinning” — allocating IPOs to top executives as an incentive to win investment banking business. Goldman denies the spinning allegation, and some analysts agree with the firm. The company’s stock eased 4% to $62.90 — not much damage in these scandal-phobic days. However, the damage to Goldman’s reputation may have long-term repercussions, denting the escutcheon of the 136-year-old firm and undermining its cachet as an underwriter and a stock. “It’s terrible public relations,” noted Brad Hintz, an analyst at Bernstein…..

Even up until this year, Goldman had engaged in some unpalatable dealings. Consider Tesoro Petroleum (TSO:NYSE – news – commentary – research – analysis). Analyst Arjun Murti put the stock on the firm’s recommend list on Jan. 8, just six weeks before Goldman would be named as a co-manager on a $245 million secondary stock offering for the Texas-based oil refiner. At the time, the stock was trading for about $13 and Murti said it was “poised for a major breakout.” It subsequently plunged in value, prompting Murti to reduce his rating to market outperformer. Tesoro now trades for about $2.

Matthew Goldstein wrote another article in TheStreet.com which also discussed the Tesoro situation. The article, while critical, also noted, “In fairness, Goldman is hardly the only Wall Street firm with investment banking ties to Tesoro that’s been overly bullish on the stock.”

We also note that Murti has been very bullish on oil prices for some time. Two weeks ago, he suggested that oil prices might have to reach $80 for demand to be dampened. Bloomberg:

Oil prices may have to rise to $80 a barrel or higher before U.S. demand for gasoline, diesel and other fuels slows, Arjun Murti, an analyst with Goldman Sachs Group Inc., said yesterday in San Francisco. “At $80 oil, we might expect some negative reaction on the demand side,” he said. “We think we’re going to need changes in consumer behavior, and it’s going to take higher prices to do that. It’s going to take a lot to change consumer behavior.”

Still, the provocative nature of the report, which appeared to be issued Thursday morning, is troubling. As the WSJ notes in its article: “Prediction of ‘Super Spike’ As High as $105 a Barrel Puts Jolt in Crude Futures:”

In the energy boom of recent years, Goldman Sachs Group’s influence has grown in myriad ways. For starters, it runs one of Wall Street’s most active energy-trading desks and owns a closely watched commodity index heavily weighted toward crude oil. Yesterday, it was a different group within the investment bank — the equity analysts — that shook up the commodity markets. A team led by analyst Arjun N. Murti repeated its assertion that the oil market is going through a “super spike” and raised the upper range of its price forecast for such a spike to $105 a barrel. The report helped send the most active crude futures for May delivery soaring to $55.40 a barrel, up 2.6%, or $1.41, at the New York Mercantile Exchange. On the year, prices are up 28%.

Perhaps it would be a better practice to issue provacative reports in the evening, rather than at the beginning of the trading day, as this appears to have been done.

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