Goldman spooks oil speculators with call to take profit

Mon Apr 11, 2011 6:25pm EDT
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By David Sheppard

NEW YORK (Reuters) - Long-term commodity bull Goldman Sachs (GS.N: Quote) warned clients on Monday to lock-in trading profits before oil and other markets reverse, with the bank's estimates suggesting speculators are boosting crude prices as much as $27 a barrel.

Traders said the call from one of the biggest banks in commodities contributed to a near 3 percent slide in U.S. oil futures, on expectations the bank's numerous clients could close out positions with U.S. crude prices up 20 percent for the year so far.

Goldman said investors should close the "CCCP basket" trade it recommended in December, which encompasses bets on rising oil, copper and other commodity prices. The trade has returned clients 25 percent in four months.

"Although we believe that on a 12-month horizon the CCCP basket still has upside potential, in the near term risk-reward no longer favors being long the basket," Goldman's commodity team, led by Jeffrey Currie in London, said in a note.

"Not only are there now nascent signs of oil demand destruction in the United States, but also record speculative length in the oil market, elections in Nigeria and a potential ceasefire in Libya that has begun to offset some of the upside risk‚ owing to contagion."

Goldman estimated in a research note on March 21 that every million barrels of oil held by speculators contributed to an 8-10 cent rise in the oil price. As unrest spread in North Africa and the Middle East, investors accumulated the equivalent of almost 100 million barrels of oil between mid-February and late March on top of their existing positions, adding approximately $10 to the 'risk premium', Goldman said.

The U.S. Commodity Futures Trading Commission said that as of last Tuesday, hedge funds and other financial traders held a total net-long positions in U.S. crude contracts equivalent to a near record 267.5 million barrels.

Using Goldman's estimates, that indicates the total speculative premium in U.S. crude oil is currently between $21.40 and $26.75 a barrel, or about a fifth of the price.   Continued...