Trust Goldman Sachs on Oil Prices

NEW YORK ( TheStreet) -- Trust is not a word normally associated with Goldman Sachs, particularly in the post-Greg Smith era.

But the firm may be a better read on the direction of the crude oil trade than President Obama and Saudi Arabia combined; not that Obama and the Saudis aren't throwing all their weight behind an effort to talk the market down from "panic" high oil prices.

Obama will appear with the backdrop of the Cushing, Okla. oil hub behind him on Thursday as he tries to take control of the pain-at-the-pump issue in an election year.

This oil photo-op comes after the hints dropped last week by British politicians that the U.K. and U.S. were preparing to tap strategic petroleum stockpiles, which did little to keep a lid on crude oil prices for more than a minute.

The Saudis said on Tuesday that they stand ready to make up for any real or perceived oil shortages, and the fear in the market about a frothy oil trade lasted as long as a good night's sleep.

"Yesterday's über bearish comments out of Saudi Arabia have been somewhat discarded for now, with its impact negatively correlated with the amount of sleep we have had since the news," wrote Summit Energy analyst Matt Smith.

Crude oil was back up on Wednesday, as the demand drawdown in crude released in the latest numbers made quick work of the bearishness. Even as distillate demand and gasoline demand were weak, the crude oil demand drawdown was enough to send oil back up. Reports that the southern extension of the controversial Keystone XL pipeline from Cushing to the Gulf Coast, otherwise known as the Cushing Pipeline, is moving full speed ahead in construction ahead of Obama's visit buoyed the WTI crude trade more than Brent.

Late in the day, the White House made official its plans to announce at Cushing that the Cushing Pipeline will be fast tracked for permitting and approvals as a top priority in a new broad push by the federal government to speed the approval of all pipeline projects as part of U.S. energy policy.

Yet the fact that the Saudis released a barrage of information on Tuesday to combat the idea that current prices were justified for crude oil, ultimately to little effect, shows just how difficult it is to make a bearish case for crude barring a major global slowdown.

So here's an idea for a better way to trade crude oil headlines than following the promises of President Obama and the Saudis. Look to Goldman Sachs.

If you remember what really crushed crude oil last year, at least as a short-term reason for a big move down - yesterday's slight move down was off a three-week high, too -- it was when a note from Goldman's commodities team telling investors to get out of the oil trade hit the wires.

Goldman is still forecasting $130 Brent crude oil, and I would bet that as long as Goldman Sachs has its $130 price target on Brent crude -- highlighted again on CNBC Wednesday morning -- there's little that President Obama or the Saudis can say to reverse the upside in the oil trade.

Sure, it's cynical and buys into all the fears of oil speculators manipulating the market. And in an irony, as CNBC showed the $130 Goldman Brent crude target on its screen on Wednesday, a commentator dismissed the idea of oil speculators. There's a fine line between speculators controlling the market and speculators massaging the crude oil market's froth.

"Longer-term prices are driven by the supply demand and you have to believe in that outlook even with the froth of speculation," Summit Energy's Smith said. That doesn't mean, though, that the froth from $124 to $130 isn't coming.

Consider this: While Goldman has not updated its $130 Brent price target to an even higher level, on Wednesday the big Goldman headline was telling investors that it was a "once in a generation" opportunity to invest in equities. Any market call that propels the risk-on trade in equities is a tangential tailwind for the crude oil trade as it hovers in the mid-$120s and is maybe on its way to Goldman's $130 target.

Even better, far-to-the left Vermont congressman Bernie Sanders quoted Goldman Sachs in a speech on Wednesday, though not to read the hated bank the riot act, but note a Goldman report saying high gasoline prices driven by speculation were causing consumers additional pain at the pump, as much as 56 cents of the pain. Talk about being on both sides of a trade, and of course, Goldman said much the same thing last year as it got ready to get out of the frothy oil trade, when it cited excessive speculation as a reason to take profits.

Yesterday's Saudi report turned out to just be one more buy-on-the-dip opportunity, as energy trader and TheStreet contributor Dan Dicker argued it might very well turn out to be.

So for the risk-inclined investor, I would go one step further: If you are looking for the real short-term leg down in crude oil, keep an eye on Goldman's $130 price target. A few days after it has cleared out of its crude oil trade, the firm will instruct you to do the same in a leaked note to clients, as it looks to drive the price lower for a long-biased re-entry point.

-- Written by Eric Rosenbaum from New York.

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