Long-term commodity bull Goldman Sachs 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.
Traders and analysts have cautioned that speculative bets can quickly unwind, dragging prices lower.
U.S. crude oil prices hit a 2-1/2 year high of $113.46 a barrel early on Monday, before reversing to post the second biggest daily percentage loss of the year, closing below $110.
Brent crude oil prices hit a post-2008 high of $127.02 a barrel on Monday, before closing more than $3 lower.
High prices have started to weigh on demand. The Department of Energy said gasoline demand in the United States -- which accounts for roughly one in 10 barrels of oil consumed globally -- is down 1.2 percent year-on-year, with average prices almost a third higher than last April.
In Libya, ceasefire plans were dashed as Muammar Gaddafi's forces shelled the besieged town of Mistrata, and rebel forces said any settlement would require the Libyan leader to stand down.
The Goldman CCCP basket trade encompassed a basket of commodities weighted 40 percent toward U.S. crude oil, 20 percent toward copper and 20 percent toward the S&P GSCI platinum index, with 10 percent in both cotton and soybeans.
The 25 percent gain since Goldman published the trade on December 1 is ahead of the 20 percent gain in the same period for the 19-commodity Reuters-Jefferies CRB futures index <.CRB>.
Goldman also recommended clients close separate trades in copper and platinum, but made no changes to recommendations for ICE gas oil, gold or soybeans.
We... believe that copper and platinum will face near-term headwinds as higher oil prices potentially translate into a negative demand shock for the metals, Goldman said.
The bank first recommended clients go long copper in October, with the trade returning 23 percent since then. In July 2009 the bank recommended the platinum trade, which has returned 36 percent in 21 months.
Goldman said it still sees copper and platinum prices rising in the long-term, and said corrections could be used to establish new long positions.
(Reporting by David Sheppard; editing by Dale Hudson and David Gregorio)