These are some pretty interesting comments by Oppenheimer’s Fadel Gheit on the big banks and their involvement in the commodity markets. In market action that is similar to the tech bubble and the conflict of interest between research firms and their investment banking arms, today, there seems to be a credible argument that the same sort of conflict of interest could exist between research arms and the trading arms of these big banks. Some will argue that this speculation is good for the economy, however, I fail to see how it is good for the economy when Goldman Sachs is changing their position on oil prices every few weeks, moving the market, creating volatility, never taking delivery and reaping the benefits by trading on these same market moving opinions. Gheit elaborates in what appears like a very common sense approach to the current commodity market craze (via Bloomberg TV):
“Unfortunately, without repeating the names of the brokers, everybody knows who the usual suspects are. These are the people in 2008 that were making a bet on $200 oil.”
“This is another form of market manipulation in my view. It is in another form of basically pushing the envelope. What you are saying or doing is not illegal, but they are allowed to do it. The government has a responsibility to slap them hard.”
Gheit on whether he thinks the notes out of Morgan Stanley and Goldman Sachs are market manipulation:
“The interpretation will be left to the market. It is a self-fulfilling prophecy. They can invent reasons why oil prices go to $130 or $150, but history has shown that these people are able to move markets. It is not Exxon or BP or Shell that moves the oil markets. It is the financial players. It is the Goldman Sachs, the Morgan Stanley, all of the other guys. It is a shame on the government that allows them to get away with that.”
“It is not illegal. All banks need to make a profit. The M&A business is not doing too well. Therefore, they need to improve their profit outlook and commodities has been the area where they make a lot of money. Commodity speculation is now a big driving force in Wall Street. Everybody wants to do it. It is not illegal, but it is not well-supervised. It is like speeding over the speed limit. If a cop doesn’t stop you, you get away with it and you continue to do it. [The CFDC] has absolutely done nothing. They talked about this for three or four years. Nothing happens. Nothing changes and I think nothing will change. Any changes will be cosmetic because financial institutions have a lot of clout and the financial lobby is very strong. Much stronger than the oil lobby.”
On whether he thinks Goldman Sachs is manipulating the price of oil:
“I am saying it is very easy to scream fire in a crowded place, everyone will run. All I am saying is that there has to be rules and the only way is to position them. You cannot allow a financial institution to take a huge chunk of the oil market and that’s a pure speculation…Why did they control hundreds of millions of barrels of oil if they cannot refine or mine. Because it is because it is legal and they can get away with it. As long as they make a profit, that is fine. Basically, the consumer will pay the price. The economy will slow down because of the few that will make a huge amount of profits.”
“All I can tell you is that when the big financial players, whether it is the buy side or the sell side, when Warren Buffet takes a position of Company X, the stock will move up. Whether or not they are influencing the market and manipulation could be a stronger word, but they are influencing the market. They are doing things that could be beneficial to them but harmful to the rest of us. That is where government comes in and says stop, enough. You have a Ferrari or a Maserati and can go 120 mph, but guess what? Those of us who can only go 60 miles per hour will be pulverized. That is where the government has to come in and say there is a speed limit here, but that is not happening.”
On whether he is surprised at today’s inventory figures:
“You have to take into account that we see these numbers don’t mean much unless they are consistent. We have not seen a trend yet, but definitely higher gasoline prices at the pump will curtail driving. By how much, we do not know. Some companies say as much as a 5% drop from last month. We’re entering the summer driving season so things could change. Gasoline prices are retreating, but obviously not by as much as they surged in the last four to five weeks. It is still in flux. We don’t know exactly which way it will go. I can tell you one thing — don’t expect much lower gasoline prices, especially oil prices.”
On demand destruction and prices coming down over the next couple of months:
“Prices will come down and the next couple of months for a couple of reasons. Oil prices are down by almost15% from more than three weeks ago. That is not reflected fully in the price of gasoline. It will happen, but it is a question of when. The mitigating factor here is how strong it will be the driving season this time around. We are still very early. Next week compared to one year ago, we will see where we are. Right now, it is a balanced picture. There is demand destruction on one hand, but there is also the beginning of the heavy driving season.”
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.