Oil is going up! No wait, down! Up!

@CNNMoney May 24, 2011: 12:53 PM ET
oil, investing, economy

Click the chart for more on oil and other commodities

NEW YORK (CNNMoney) -- It's Goldman Sachs' market. We're all just living in it.

The investment bank that a writer at a prominent music publication has compared to a certain parasitic cephalopod is at it again Tuesday.

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Only a little more than a month after (correctly) predicting a plunge in oil prices, Goldman's (GS, Fortune 500) commodity researchers reversed course and raised their target for Brent crude to $120 a barrel by the end of the year. (The more widely quoted contracts for West Texas Intermediate oil trading on the New York Mercantile Exchange are currently hovering around $100.)

This about face shouldn't come as a huge surprise.

Goldman's economists hinted in a report over the weekend that the firm's commodity team might soon boost its forecast for oil prices. And I pointed out in a column last week that Goldman's bearish call on the dollar didn't make much sense unless the investment bank was also planning to change its tune on crude.

But oil prices still spiked higher Tuesday -- similarly bullish calls on oil from Morgan Stanley (MS, Fortune 500) and JPMorgan (JPM, Fortune 500) probably helped.

The market is simply obsessed with commodities as of late. For the most part, when oil prices have gone up, so have stocks. And vice versa.

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Oil is being viewed as a proxy for the global economy. If it's going up, it must mean good things about demand from China, India and other emerging markets, as well as the slow recoveries in the United States and Europe. If oil's going down, it must mean that demand is falling.

But here's the big problem. Read the next sentence in the dramatic style of a movie trailer voiceover for maximum effect. In a world gone mad where nothing is what it seems, the market can only count on one thing: uncertainty!

Yes, for every case that can be made as to why crude should rally, there's an equally compelling argument for why oil should plunge back toward pre-Arab Spring levels.

It's reasonable, for example, to predict that oil should drop like a stone once the Fed's QE2 program is finished at the end of June because the completion of the central bank's bond buying binge could lead to higher long-term interest rates, a stronger dollar and a big plunge in stock prices.

But it's also reasonable to think that the Fed will continue to leave short-term rates low at a time when other central banks around the world are hiking them to combat inflation. And that could lead to a weaker greenback, higher oil prices and more life for the aging bull market in stocks.

"Most of the world is still concerned about the unknowns of what happens after QE2," said Chuck Butler, president of EverBank World Markets in St. Louis "And this market is all about sentiment."

If you're a long-term investor (and in this day and age, that's someone thinking past next week it seems), it's enough to make your head spin. It's Looney Tunes on steroids. Rabbit season! Duck season! Rabbit season! Duck season! Duck season! Fire!

So short-term calls like Goldman's on oil are likely to become more commonplace as traders look to cash in on rapid changes in sentiment in a short period of time.

"Is buy and hold dead? Maybe not. But you have to work a lot harder for your money in an environment like this," said David Joy, chief markets strategist with Ameriprise Financial in Boston.

StockTwits blogs: Do Goldman analysts talk to each other?

It's all a bit silly. Investors didn't seem to care that as crude prices were falling, so were gas prices. The average nationwide price of gasoline came thisclose to $4 a gallon a few weeks ago and since has dropped to about $3.83.

Of course, that's still very high but at least prices are dropping instead of surging to new records. It wasn't that long ago that many thought gas would top the summer 2008 peaks in short order.

If oil prices start climbing again, the market may cheer that news in the short-term. But that won't be good news for either consumers or many big companies.

Mark Lamkin, CEO of Lamkin Wealth Management in Louisville, Ky., said he thinks spiking commodity prices are the most significant risk facing the market right now. Simply put, many companies have to take a hit to profits because if they try and boost prices too much, their sales are likely to drop.

"Rising commodity costs mean higher input costs for companies. A company like The Gap (GPS, Fortune 500) is getting killed," said Lamkin, referring to the retailer that warned last week its earnings would suffer due to a pop in cotton prices.

So investors should not be pleased by Goldman's latest call on oil. Then again, the good news is that if oil does reach Goldman's new target quickly, I'm sure that they'll just do another 180 and predict that prices will plunge again soon.

Lather rinse repeat.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks. To top of page

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