Crude Oil - Commentary from Ansbacher | Tim Price

Few things stir the blood more than Wall Street firms getting into a good old scrap. Put aside the internecine squabbling at Morgan Stanley - they don't come much better than the current dust-up between Citigroup (metals "super cycle") and Goldman Sachs (oil "super spike"), and Merrill Lynch - whose chief equity strategist, David Bowers, on Monday poured water on the idea of what he described as a resources bubble.

That the metals, oil and resources markets have been robust for some time is well known - particularly to all those sell-side analysts who have been busy revising up their price forecasts for metals, oil and resources so that they don't look grotesquely stupid and merely somewhat behind the curve. This is, by the way, most of the Street. The commodities boom has taken probably the majority of Wall Street brokers by surprise. Nor is the boom necessarily over simply because one strategist says it is. Yesterday saw the world's largest mining company, BHP Billiton (voluntary disclosure: this investor is long) reportedly in a stand-off with Japanese and Chinese steel mills over negotiable iron ore prices. The FT suggested that if BHP Billiton wins out, it will secure price rises of over 100%. That is a booming market by anyone's measure. One might add that no less a personage than Boone Pickens, Dallas hedge fund manager and former oil executive, predicts that crude oil prices will finish the year above $60 a barrel. Two things differentiate Mr. Pickens (and doesn't that sound quaintly Dickensian ?) from many sector analysts. One is that he has real experience in the business, running Mesa Petroleum until 1996. The other is that he has substantially his own capital at risk. The analysts, on the other hand, are doing what analysts do: busily firing price targets into the ether for us to appreciate or discard at our leisure. Those opinions may or may not derive from a) industry experience; but in these shrinking, Spitzerian days, they are b) certain not to derive from any personal commitment of risk capital. Right now there may be more analyst price forecasts for oil, metals and resources than there are analysts for oil, metals and resources. Whatever the underlying dynamics of these commodities, there's a thriving market in the issuance of price forecasts for them. For this reason, we will decline from adding to this groaning Everest of unsolicited opinions. John Burnham of Burnham Securities told Bloomberg News of his scepticism with regard to what one might term the objective purity of Goldman Sachs' price forecast for oil:

"totally self-serving" because the company is "one of the largest commodity traders in the world."

It should not be breaking news that sell-side firms remain as riddled with conflicts as Europe during the Second World War. What is surprising is that anybody - outside the media, who at least have the defence of column inches to fill - pays sell-side analysts any attention whatsoever. Did Grubman and Blodget fall on their swords in vain ?

Five years after the equity markets buckled and snapped, we remain in a febrile world where bubbles - and bubble-spotters - abound. Unsustainable booms lurk around every corner. Real estate. Private equity. Hedge funds. Commodities. Bonds. (Are there many types of assets left ?) There is something mildly wondrous about the folk complicit in the last genuine bubble - stocks - warning us in advance about the next one, and attracting anyone's attention in the process.

And what Greenspan has to say on the subject of the oil price 'frenzy' must be measured against his disingenuous claim that bubbles are only evident after the fact.

Barry Ritholtz, however, nails what he calls "the stupid phase of oil":

"We find it ironic that oil doubters - the ones who were so harshly negative when crude was between $40 and $45 - have suddenly found religion. We recall hearing about the $20 "terror premium".. We were even warned that the Chinese economy was slowing (that implied lower oil, also).

"Indeed, we had heard every "excuse" for the price of oil - except for the one that mattered: a gradually improving global economy, one that was concentrated in Asia but particularly in China and India..

"As oil passed $50 on the way to $55, something intriguing occurred: the oil Bears became rip-roaring Bulls. We now enter what we academically refer to as 'the stupid phase,' with calls for $100 crude and unsustainable gains in the energy sector."

And as Ritholtz rightly observes, it's rarely the news, but rather the reaction to that news which is telling. What we won't be hearing from any Wall Street firm in relation to the direction of oil, metals and resources prices is a stark confession of their ignorance, let alone an acknowledgment of the vested interests that might colour their otherwise objective research. In 'Adventures in the Screen Trade', a personal view of Hollywood, screenwriter William Goldman suggested that nobody knows anything. He should try working with securities analysts

Tim Price
Senior Investment Strategist
Ansbacher & Co Ltd.

Winner, 2005 Private Asset Managers Awards:
Investment Performance - Defensive Portfolios

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Oil prices surge to new records | BBC
Crude oil prices hit record levels on Friday, with leading investment bank Goldman Sachs warning the cost of a barrel could eventually top $100.