Goldman bailing out of commodities?

Tuesday, 12 April 2011 11:31

Large movements in the commodity markets today were initially driven by Goldman Sachs as they advised clients to cash out of oil which contributed to futures slipping nearly 3 %. So is Goldman advising clients to take profits as they see the near term risk reward no longer favors being long?

Goldman's is focused in the near-term and could suggest the commodities bull market is running out of steam, this could be aided by the high levels of speculative bullish positions in the oil market. Based on this speculative trade any combination of bearish factors could lead to a massive unwinding of positions and a very harsh retreat in prices. Could Goldman be looking to push commodity prices down in the short term and then re-position back in at lower levels?

They are positive on long term prices so is this just a overall book resetting trade? Falling commodity prices will result from a stronger US dollar and the movement across commodities mirror the movement in currencies. There are now signs of falling oil demand in the US and with a pottential peace agreement in Libya and less chaos in the global oil supply and this will certainly help reduce the upside in the short term. Most countries would welcome a pullback in the crude price which would offer some much needed relief.

Goldman's position in the commodity markets will become more accountable on April 19 when the firm releases first quarter earnings. Goldman's Value-at-Risk (VaR) indicator for commodities will show the firms position and risk for these sectors. Previous VaR numbers showed caution in the final quarter of 2010, Goldman posted its quarterly results on January 19 and commodities trading risk hit a near seven-year low which could suggest the firm had reigned in it's risk of oil, metals and grains prices.

Goldman's VaR for commodities stood at $23 million for the fourth quarter ended December 31. That was down 20 % from the $29 million in the third quarter and almost 40 % lower than the $38 million seen a year earlier.