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With the world’s largest energy trader predicting $45-$50 oil by year’s end, Goldman Sachs and UBS jumping on the bandwagon, and CitiGroup calling oil “the trade of the year,” many believe that now is finally the time for traders to start nibbling into oil on any new fall.
So far, all calls for a bottom have failed, but the world’s largest investment banks and the largest energy trader hold forth that fortune favors the brave—and that it will particularly favor the brave this year, possibly within the next few months.
With this in mind, analysts from Goldman Sachs, UBS, CitiGroup and the largest energy trading firm in the world, Vitol, are forecasting more or less a 50 percent rise in oil prices by the fourth quarter of 2016, and they are prompting investors to get in on oil within the next one to three months.
Fortune doesn’t always favor the brave, though—especially in the oil game. Several traders who were brave and kept purchasing oil at intervals when analysts were predicting a bottom during its fall from $100/barrel levels have been decimated. Only the cautious have survived the fall.
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Don’t forget Goldman’s famous target of $200/barrel, which turned out to be a real howler. Since then, the investment house has regained some of its lost prestige by forecasting a target of $20/barrel when the price was close to $45/barrel. Though the price hasn’t touched $20/barrel, it did break under the $30/barrel mark. Under such bearish circumstances, for Goldman Sachs to predict a 50 percent rise by December 2016 is a brave move.
Goldman Sachs’ analysts Jeff Currie and Damien Courvalin are of the opinion that the supply glut will turn to supply deficit by the end of the year, mainly led by a drop in U.S. production by around 575,000 barrels. Their view is that by year-end, the fundamentals will rebalance and lead to a new bull market. For the first half of 2016, Goldman is maintaining the forecast at $40/barrel.
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Then we have Citigroup, which is calling oil the ‘trade of the year’.
CitiGroup analyst Ivan Szpakowski is calling for a bottom within one to three months, forecasting $52/barrel in the fourth quarter of this year.
Dominic Schnider, head of commodities at UBS Wealth Management, expects a 32-43 percent return from energy over 12 months.
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Vitol, the largest oil trader firm in the world, also expects a major turnaround by the end of 2016. In an interview with Bloomberg, Vitol CEO Ian Taylor, a veteran trader, accepted difficulty in calling a bottom, but was certain about prices hitting $45-$50/barrel by the end of December.
Traders will re-enter this game when the risk-reward ratio is favorable, and with so many large houses forecasting huge upsides, it might just be the right time to start nibbling. The question is would Goldman Sachs risk two howlers in a row?
By Rakesh Upadhyay for Oilprice.com
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Rakesh Upadhyay is a writer for US-based Divergente LLC consulting firm.