In a recent report, Goldman Sachs analysts gave their take on the current oil price environment and suggested three trades to capitalize on the situation.
Despite weak fundamentals in commodity markets, Goldman sees retail money rushing into the space and providing temporary support. Analysts feel that the recent spike in commodity markets provides a selling opportunity.
The report notes that U.S. inventory builds have averaged 1.0 million barrels per day (b/d) since the end of December.
Analysts see inventory builds continuing to grow and spread globally in upcoming months due to weak Chinese import numbers coupled with only modest production decreases.
In January, global oil production decreased by only 235,000 b/d. In addition, U.S. rig count declines so far are insufficient to have a meaningful impact on North American production as producers continue to increase their efficiency.
The “Oil Convergence” Trade
The first trade that Goldman suggests is to buy ICE Europe Brent oil Aug-15 puts struck at $57 per barrel (at a premium of $3.79) and sell ICE Europe Brent oil Aug-15 calls struck at $70 per barrel (at a premium of $3.84). Goldman’s six-month Brent target of $43 per barrel would produce a $14.05 return on the trade by expiration, with a stop on the close at $77 per barrel limiting potential losses at $7.
The “Other Shoe To Drop” Trade
Goldman analysts see weak demand from China and further deflation pressures on the price of copper. Goldman currently holds an outright short position on LME Dec copper futures. They initiated the position at $6580/t and have a target of $5,200/t.
Oil Could Hit $20, Says Citigroup
The “Energy Deflation Hedge” Trade
Goldman analysts do have one commodity market that they believe is worth holding a long position in: palladium. Analysts see an increased demand for palladium from several sources, including U.S. and Chinese auto demand.
They recommend opening two equal-sized positions: one long position in a “S&P GSCI-style” rolling front month palladium index and one short position in a “S&P GSCI-style” rolling front month platinum index. They recommend a target of 15 percent and a stop loss at seven percent on the combined position.
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