Outside-IN

Goldman Sachs' oil forecasting prowess … or lack thereof

Wall Street titan cuts its forecast for the commodity, but should anyone pay attention? If history is any guide, not really.

Oct 30, 2014 @ 10:20 am

By Paul Schatz

The Goldman Sachs Group Inc. is often in the limelight for hiring the best talent on Wall Street, winning the high-profile deals, having close ties to the government and paying enormous compensation. It's also a firm under intense scrutiny and often in the cross hairs.

The last time I wrote specifically about one of their market calls was when they “curiously” downgraded the biotech sector in January 2014.

This week, Goldman cut its crude oil forecast by $15 a barrel, which, on the surface, should not get much attention. But it did get me thinking. I vividly recall 2008, when oil was soaring and the country was worried about it never ending. At that time, Goldman called for $200 a barrel oil when oil was $125 and had already rallied $40 in under six months. To me, it seemed as though the venerable firm was caught up in the hype and hysteria, and was only inflating the bubble even more.

So this morning, I did some research and found other occurrences of Goldman changing its forecast on energy. To be fair, it is certainly possible I may have missed some, but below is what I could find.

As you can see below, in June 2008, with oil at $125, Goldman raised its target to $200. Oil did rally for another month before utterly collapsing to $35 in less than a year.

In May 2011 (below), Goldman raised its forecast on oil, only to see it plummet almost immediately by 20%+.

In October 2012 (below), the firm lowered its target on oil, but within a few weeks, oil began a major rally.

Today, as you can see below, after oil was taken to the woodshed, Goldman cut its forecast by $15. If history is any guide, and I believe it is, the next significant move in oil should be a major rally.

My takeaway from this is that just because Goldman Sachs is cheered, revered or sometimes jeered, doesn't mean they have a good crystal ball or make accurate forecasts.

Paul Schatz is president of Heritage Capital.

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