There is little doubt that the price forecasts of the Goldman Sachs energy team have taken on an almost mythic aura. Maybe that's because their strongly bullish projectoins have been so on-the-money now for more than a year.
So it's no surprise that the latest forecast by the team, led by Arjun Murti, was cited as a factor today as crude prices raced through $122/b for West Texas Intermediate, and NYMEX RBOB gasoline and heating oil both set new records, their first since late April.
"We believe the current energy crisis may be coming to a head, as a lack of adequate suply growth is becoming apparent and resulting in needed demand rationing in the OECD areas, in particular the United States," the report said. "The possibility of $150-$200 per barrel seems increasingly likely over the next 6-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty."
Goldman Sachs raised its average annual price estimate for 2008-2011 to $108/$110/$120/$120 from $96/$105/$110/$110, but conceded that the forecast for this year and next year may have risks that are "distinctly to the upside." "Effectively, we are still building in a path of moderate increases from recent levels but a longer duration in assuming the cycle continues through 2010," Goldman said. "An alternate price path for 2008-2011 might well be $125/$200/$150/$75 per barrel."
The report cited several fundamentals as the reason behind its bullish forecast. Non-OPEC supply is "struggling to grow"; spare capacity in OPEC countries remains tight and exports are pressured by low internal production growth and higher domestic demand; restraints on foreign investment in oil exporting nations; and healthy demand in non-OECD nations.
The US and other Western nations appear to be doing their part to balance supply and demand, but the report says they will need to do more. This is not some cry for everybody to all pitch in, like buying war bonds; it's basic economics.
"The fact that negative oil dlemand and lower refinery runs has not led to any meaningful build in inventories signals that world oil suplies remain tight," the report said. Since non-OECD nations show no signs of slowing their demand increases, and prices are often capped or subsidized in those regions, "we believe OECD demand rationing is likely to continue," the report said. "In essence, global oil demand cannot grow faster than global oil supply. To the extent the latter is (flat), the former will have to be the same. After all, one cannot demand that which does not exist."
Throw out enough wild calls and a couple are bound to be right. Since Arjun Murti is first and foremost an equity analyst, see his disastrous call on being bullish on refining margins and the stocks. He had a $110 price target on Valero at one point last year and had Sunoco as a "conviction buy" up until today. His thesis that refining margins are positively correlated to oil prices, well we know how that turned out.
Goldman's behind the curve on predicting oil prices rises. CIBC, Deutchse Bank, and others have all made far worse predictions than Mr. Murthi.
Just more of the same
Self fulfilling prophecies --if enough people say it and enough believe it then more speculators will provide the funds to raise oil prices some more. When the bubble bursts watch for the tears from those who put their life savings into oil stocks and oiul futures and want someone to "compensate" them! We have relatively the same demand .supply fore cast at $120 as at $60..