Thank Goldman Sachs, not weather, for oil price plunge

Investment House
Slashed Energy
in Commodity Index

By Michael Norman
New York Post
Monday, January 8, 2007

http://www.nypost.com/seven/01082007/business/energy_dumped_business_mic...

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 that 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.

"If Goldman's model tells them to cut their energy exposure by half, they do it," says Warren Mosler, president and chief investment strategist of Valence Corp., a multi-billion-dollar hedge fund.

Mosler said cutting crude allocations by more than half will help to reduce inventories in the medium term and once those surplus inventories are liquidated prices will begin to rise again.

Last August, Goldman reconfigured its index by removing a Nymex unleaded gasoline contract that was being phased out.

The move triggered a huge selloff in gasoline almost immediately.

Prices eventually stabilized when a new contract was added, but the change produced huge losses at many hedge funds.

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