GSCI Cuts Energy Exposure (Again)

File this one under "Oops! They did it again."

You might recall this past September, I asked the assembled multitudes for a market mechanism showing why Oil was tumbling. TBP readers correctly pointed out to the change in the Goldman Sachs Commodity Index (GSCI) (Here, here and of course, here).  Tim Iacono did a nice job on the details the following month.

That mid-year halving of the gasoline weighting caught quite a few people by surprise. The timing — slashing energy futures weightings 2 months before the mid-term elections — was stunning to say the least. The GSCI changes had wide ranging impacts, leading (indirectly at the very least) to: Amaranth’s implosion, a drop in CPI / inflation rates, the market rally since the July lows, and of course, GS’s record setting Q3/Q4 profits (Hey, its nice to be the House). 

Several observers have noted that January saw another rebalancing downwards of the energy exposure in 2007. Consider this from the NYPost

"It might be a better idea to thank Goldman Sachs, not the weather, for the recent plunge in oil prices. While recent balmy temperatures have certainly played a role in last week’s dip in oil prices, a lesser known, but equally powerful, move by Goldman at the start of the year might bear some responsibility as well.

Goldman cut the energy portion by as much as 50 percent in some of the sub-indexes that comprise the widely followed Goldman Sachs Commodity Index, tamping down moves to buy them by large investment funds who mimic Goldman’s index.

The changes took effect this month and apply for all of 2007, a Goldman spokesman said. Crude oil futures plunged 9 percent Wednesday and Thursday to $55 a barrel, before settling Friday at $56.31. The two-day decline was the sharpest since December 2004.

The GSCI is influential because large institutional investors like pension funds and endowments invest according to its allocation model."

The only question this time around is how this move will impact the overall equity markets. The last time Goldie rebalanced, markets were deeply oversold. This time, they are overbought.

Stay tuned . . .

UPDATE: January 9, 2007 9:45am

It looks like these GSCI changes are getting far more notice far sooner than the last batch . . .

Getting Burned on Oil
David Gaffen
MarketBeart, January 9, 2007, 9:02 am

Index Shakeup Hits Oil Markets
Joe Duarte (1/08/07)
Wall Street Window, Mon, 2007-01-08 12:45.

Retooling the GSCI
David Shvartsman   
Finance Trends Matter, January 08, 2007


NEW YORK POST, January 8, 2007

Same Crowd Behind Oil Rise Now Sells Out
Large Investors Got In, Find ‘Rollover’ Costs Too High to Stay On
January 9, 2007; Page C1

Commodity/energy indices may face sell off
Matthew Robinson
Reuters, Mon Jan 8, 2007 5:25pm ET

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What's been said:

Discussions found on the web:
  1. Macro Man commented on Jan 9

    So which election is this rebalancing meant to be rigging?


    BR: None — this is the annual rebalancing.

  2. jmf commented on Jan 9

    thanks / danke from germany

    havn´t read this anywhere and this maybe explains some of the action we´ve seen.

    the main difference is that it hasn´t helped (yet) bonds or stocks this time.

  3. Guest commented on Jan 9

    Thanks a lot for the info. This is the kind of news and analysis that make your blog a must read for me everyday.

    1) If energy weights went down, should not other commodities’ weights go up in the index. Which commodities are benefitting? Seems like everything is going down.

    2) The conspiratorial theory does not make sense. If Goldman knew of the potential effects on energy prices, inflation and thus on fixed income markets – their hedge fund lost its shirt in 2006 shorting fixed income.

  4. Teddy commented on Jan 9

    Guest, Goldie knows all cuz Goldie makes the markets. Whatever Goldie wants, Goldie gets….and Goldie wants a strong dollar for GOLDIElocks. Long live the dollar! And debt is good (FOR YOU) cuz it means lower interest rates and higher values for stocks and bonds!

  5. commented on Jan 9

    Energy Market Tea Leaves

    Barry Ritholtz:BP readers correctly pointed out to the change in the Goldman Sachs Commodity Index (GSCI) (Here, here and of course, here). Tim Iacono did a nice job on the details the following month. That mid-year halving of the gasoline…

  6. wally commented on Jan 9

    Decreasing consumption – just as for copper, etc.
    Supply and demand still matter in spite of what the latest conspiracy theory says.

  7. Gary commented on Jan 9

    Simple supply and demand. Same reason oil went up in 02-06. But since no huge supply has come on line the problem has to be global demand. It would certainly appear that something is wrong with the global economy. This freefall in all commodities just means the infrastructure expansion is going to slow or stop altogether. So when the global economy starts to expand again we still won’t have fixed the commodity supply constriction.

  8. Gary commented on Jan 9

    I’d have to note that even after the huge sell off in oil the transports still can’t get any traction. The warning signs are in plain site for any who want to see them.

  9. DavidB commented on Jan 9

    Think maybe their important clients are in airlines?

  10. OldVet commented on Jan 9

    I think the price action in oil recently is more the fickle change of opinion of speculators than the working of supply & demand.

    Wait till somebody drops a bomb on Iran or some other unexpected event occurs. World economy slowdown under way is bound to have a negative effect on the price of oil, but not suddenly.

  11. Teddy commented on Jan 9

    Putin and Chavez can’t be too happy. Screw them!

  12. Craig commented on Jan 9

    Oldvet is correct. If there was oil in Somalia this AM would be quite different.

    The world and oil supply lines are no safer today then last year.

    Maybe look to big div payers in oil to get some support/hedge. Oh, Canada….

  13. Gary commented on Jan 9

    Oil has been in a waterfall decline since Aug. with only a very weak reaction over the past 3 months. Doesn’t seem sudden to me. BTW the utilities also had a large (almost 2%) break below recent support the other day. Seems that the decline in energy could only help them. So why the big drop? With all the bullish comments coming out of wall street it certainly looks like the smart money is trying to unload their positions to the little guy all over again, just like they did in 2000.

  14. Red Pill commented on Jan 9

    If a world recession is coming, wouldn’t it make sense to get out of energy?

  15. phil commented on Jan 9

    Does Goldman Sachs tell the market in advance or do they just change it one day without telling anyone of ther intenetions?

    If I were in the conspiratorial camp, I’d view this quiet differently than Goldman being the bogeyman trying to hurt traders. Most likely they would be trying to lower oil prices to slow down world terrorism that has been funded by our reliance on Mid East oil and Russia’s militant anti-west revival.


  16. weezielovesmoonpies commented on Jan 9

    The Karl Rove conspiracy theory–as put forth by Tim Iacono and some commentors here–was that GS manipulated oil last summer to help their Republican buddies come November.

    The implication was that GS acted on political rather than financial motives and would therefore re-adjust upwards after the election.

    And yet, they continue to reduce exposure to oil…

    This tells me that GS is listening to Barry, not Karl Rove, and believes that recession looms with high probability.

  17. Max commented on Jan 9

    1) Putin cuts off oil to Europe.

    2) Chavez nationalizes everything he can think of.

    3) Goldman crashes the price of the oil those guys depend on to finance their mischief.

    Coincidence? Yeah, right. Oil as a weapon cuts both ways.

  18. Teddy commented on Jan 9

    Da Weez: To synopsisize, R U saying that when Barry speaks, the world listens……..eventually, but only after Goldie?

  19. Max commented on Jan 9

    Putin cuts off oil to Europe.

    Where did you hear such nonsense? Belarussia steals the transit oil from Russia to Poland, that’s why Transneft (the Russian Oil Co) suspended the transit until the matters are resolved.

    Not only that, Russia is building its own oil pipeline in the Baltic Sea, so that once and for all they can bypass these ripoff transit countries. This is why so many of them are squealing “Help! Bad Putin!!!” now.

  20. Max commented on Jan 9

    If the oil really crashed in the summer (peak driving season) due to market forces, then it is obvious, that much more slides are under way.

    It is quite possible to see a replay of the 80’s.

  21. Les commented on Jan 9

    Meanwhile the BLS modifies the weights for the Producer Price Index at the same time.

    PPI Weights to be Updated

    The Bureau of Labor Statistics will soon update the value weights used
    to calculate Producer Price Indexes to more accurately reflect recent
    production and marketing patterns. The new weights, which will be
    introduced in February 2007 with the release of January 2007 index data,
    will be based on shipment values from the year 2002. These value weights
    come from the Census of Manufactures, the Census of Mining, the Census of
    Services, and the Census of Agriculture. PPI weights have been based on
    1997 census shipment values since January 2002.

    All indexes will be affected by this weight update, including all the
    industry net output indexes, as well as those calculated for traditional
    commodity groupings. In addition, weights will be updated from the 1997 to
    the 2002 census for all stage-of-processing indexes, durability of product
    indexes, and special commodity-grouping indexes. This weight revision will
    not change the arithmetic reference base, in most cases 1982 = 100, of the
    PPI index system.

    It is important to note that the PPI classification system and
    aggregation structure will not change as a result of these weight
    revisions. The weight update, however, will result in significant shifts
    in the relative importance of various industries and products, and these
    shifts will impact future aggregate indexes in a manner commensurate with
    the relative gains and losses in value weights from 1997 to 2002.

    Relative importance figures as of December 2006, based on the 1997 and
    2002 weighting schemes, will be available on February 14, 2007, two
    business days prior to the release of January 2007 PPI data. This
    information will be available on the PPI website at or by
    calling the Division of Industrial Prices and Price Indexes, Section of
    Index Analysis and Public Information at 202-691-7705.

  22. Tim commented on Jan 9

    Since all of Barry’s commenters love me so, you’ll be the first to know my thoughts on the latest developments at Goldman Sachs:

    Is Peak Oil Already Here?

    Please be sure to read beyond the first paragraph.

  23. m3 commented on Jan 9

    I think the price action in oil recently is more the fickle change of opinion of speculators than the working of supply & demand.

    Wait till somebody drops a bomb on Iran or some other unexpected event occurs.

    i never quite understood this. the same geopolitical problems exist now at $55 crude as $78. if anything, they are *worse*.

    in late 2005/early 2006, the broad economic community (including S&P, OPEC, IEA, the Fed, etc.) forecast that the economy, and of course crude demand, would decline in the second half of 2006. that is *why* the fed paused.

    and true to form, oil topped out just after the start of the second half of the year. 3Q GDP was revised UP to 2% from 1.5%. that’s a weak economy in 2H of 2006 suppressing oil demand, even thought the geopolitical risks were still present.

    the geopolitical, and “warm weather” arguments just affect volatility, but not the underlying price trend…

    i’m no chartist, but the trend ain’t exactly up for texas tea in the last 6 months or so.

  24. someguy commented on Jan 10

    I can’t figure out why we’ve been paying a $30 or $40/bbl premium all this while for stuff that never materialized ?

    Go back and look at my posts. I’ve been predicting a drop in oil forever. The supply/demand equation never was really out of balance. It was all speculation. Inventories are high. Traders got crushed in mid November when Cushing ran out of storage space. They were hoping cold weather would cure that little problem, but not with the weather we’ve been having ! If we hit April with inventories still intact and the economy, slowing, we are going to see $30 oil easily !

    Now what the heck is up with natgas ! Its Jan 9th and inventories are near 3TCF and natgas is over $6 ! Wow. Funny the press doesn’t pick up on the fact that natgas is way, way more linked to cold winter weather than heating oil and yet oil is falling and natgas isn’t ? Doesn’t make sense at all !

    I expect natgas to fall about $2 in a single day pretty soon. The inventories are so huge right now and there is only 3.5TCF of storage !

  25. someguy commented on Jan 10

    There is a huge conundrum in the energy market.

    Heating oil is down 4 cents a gallon this morning because there is a surplus of it. And remember heating oil includes things like diesel fuel, which we use lots of. So if it isn’t burnt in a house furnace, it will get burned in a truck this summer.

    Then there is natural gas, which has been climbing this week and sits at $6.66. Natural gas is ONLY a heating fuel (and some power generation and industrial processes). If it doesn’t get burned this winter in a furnace, its going to sit all summer. And storage levels are ridiculously high and natural gas is a lot harder to store.

    So is heating oil over reacting to the weather or is heating oil not about the weather at all or is natural gas poised for a giant correction ?

    Something is wrong here.

    It can’t be about the weather or heating oil and yet not be about the weather for natgas.

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