Oh my. We hope you’re sitting down because the following might come as a bit of a shock.
On Tuesday Goldman Sachs’ commodity team admitted they may have got something wrong:
The market remains caught in the tug-of-war between weaker-than-expected DM demand, which creates near-term downside risk and stronger-than-expected EM demand, which creates longer-term upside risk, leaving the market in a new higher trading range.
Emerging markets demand has continued to surprise to the upside over the past months, yet this failed to offset the lag in developed market distillate demand, leading inventories to draw more slowly than we anticipated. However, the market is increasingly expecting EM demand to crowd out future OECD demand growth, and is putting upward pressure on long-dated prices, leaving the market in a new higher trading range of $75/bbl to $82/bbl.
In other words, Goldman is saying they under-estimated the size of the distillate overhang and the degree to which demand destruction was affecting OECD countries.
There was also a bit of a capitulation on the strength of the contango floating storage trade — i.e. while stocks might have been falling onshore, offshore stocks – much more difficult to monitor — were coming in to compensate:
On net, combined onshore and offshore inventories have been only slowly declining as an increase in floating storage was offset by a strong decline in OECD industry stocks. Total hydrocarbons at sea rebounded again in October, particularly as floating products stocks, which consist predominantly of distillates, showed another increase from 75 million barrels in September to 82 million barrels in October (see Exhibit 2). However, OECD onshore inventories continue to decline, with US stocks down 19 million barrels alone, while European inventories declined 6 million barrels, mostly distillates which is encouraging given the overhang in the distillate market. Net, combined OECD total hydrocarbon stocks and total hydrocarbons at sea declined 15 million barrels in October against a 5-year average seasonal build of 6 million barrels (see Exhibit 3).
The following chart provides a useful view of the overall offshore storage picture as it has been developing :
Of course, as always, the Goldman team did have a Black Swan-esque excuse for their underestimation:
Part of the recent weakness in OECD demand can be explained by transient factors. While we do not want to lean on this explanation too much, there are several factors that have delayed the demand rebound, including a record delay in the US harvest, which typically requires significant amounts of diesel to complete.
Meaning, their overall six-month forecast for front-month crude remains unchanged at $90 per barrel. This, as they noted, was because US demand for diesel should increase in coming weeks as farmers return to harvest crops.
Related links:
Goldman still bullish on commodities: Oil, corn, copper to rise - FT Alphaville
Goldman still bullish on crude (even in the face of weakness)- FT Alphaville