Tuesday, August 19, 2008

Goldman’s Oil Thesis: Timing is Everything

Inside baseball. Oil was recently up $2.22 at $115.09.
From 1440 Wall Street:
Gyrating markets can sure interrupt beach season in the Hamptons. My attempts to unplug have been largely unsuccessful, and the collapse in oil and other commodities have the wheels spinning inside my Neanderthal-like brain cavity.

But grunting at my screen will only get me so far. They say that imitation is the sincerest form of flattery. And on Wall Street, very few people have original ideas. A Goldman Sachs research note from July 31st has been keeping me awake at night, and it appears I am several hours late in passing along my take....

... July 31st
Negative gamma issues pose near-term downside risk, but we maintain a year-end forecast of $149/bbl

Concern over demand weakness was likely a key driver behind a large financial liquidation that has underpinned the recent sell-off. The liquidation has brought prices close to levels where a large amount of put options are struck....

....increasing the risk of further selling pressure as financial traders who sold the puts need to sell further contracts to delta hedge their portfolio- a dynamic that we call the “negative gamma effect”....MORE