GSCI Cuts Energy Exposure (Again)

Tuesday, January 09, 2007 | 06:11 AM

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

Tuesday, January 09, 2007 | 06:11 AM | Permalink | Comments (23) | TrackBack (1) add to | digg digg this! | technorati add to technorati | email email this post



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» Energy Market Tea Leaves from
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... [Read More]

Tracked on Jan 9, 2007 9:50:24 AM


So which election is this rebalancing meant to be rigging?


BR: None -- this is the annual rebalancing.

Posted by: Macro Man | Jan 9, 2007 8:26:40 AM

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