Troubled waters push price of oil ever higher
The cost of crude may go as high as $200 as output fails to keep up with needs of developing nations and US motorists hit the road for summer
Crude oil may rise to between $150 and $200 a barrel within two years as growth in supply fails to keep pace with increased demand from developing nations, Goldman Sachs Group Inc analysts, led by Arjun N Murti, said in a report.
New York-based Murti first wrote of a "super spike" in March 2005, when he said oil prices could range between $50 and $105 a barrel through 2009.
The price of crude traded in New York averaged $56.71 in 2005, $66.23 in 2006 and $72.36 in 2007. Oil rose to an intraday record $120.93 yesterday on speculation that demand will rise during the peak US summer driving season.
"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," the Goldman analysts wrote in the report dated May 5.
A report this week showed US service industries expanded in April, signalling higher energy use. The Institute for Supply Management said its index of non-manufacturing businesses, which make up almost 90pc of the economy, grew for the first time since December.
China is increasing its refining capacity and boosting imports to meet rising demand for the Olympic Games.
US gasoline demand typically climbs going into the summer season when Americans take to the highways for vacations.
The peak-consumption period lasts from the Memorial Day weekend in late May to Labor Day in early September. Monthly fuel sales were the highest during August in five of the last six years, according to data from the Department of Energy.
China, the world's fastest-growing major economy, has more than doubled its oil use since New York crude oil dropped to this decade's low of $16.70 a barrel on November 19, 2001.
Record prices have failed to stem rising consumption in developing nations, with demand led by China, India and the Middle East.
Dispute
Price forecasts for spot US benchmark West Texas Intermediate crude oil for 2008 to 2011 were revised higher by Goldman. The 2008 price estimate was raised to $108 a barrel from $96, the 2009 forecast to $110 from $105, and 2010 to 2011 estimates are projected at $120 from $110, the analysts said, citing slowing supply growth in Mexico and Russia, and low spare production capacity in OPEC.
Oil has also rallied amid a dispute between the US and Iran regarding the Persian Gulf oil producer's plan to develop nuclear energy.
In Nigeria, Africa's biggest oil exporter, militants have attacked oil installations and kidnapped workers since the beginning of 2006, forcing Royal Dutch Shell Plc to halt output.
In Venezuela, production has slumped to about 2.34m barrels a day from almost three million barrels a day in 2002, according to Bloomberg's estimates, before President Hugo Chavez fired almost 20,000 workers who had closed the state oil company in an attempt to overthrow the government.
Infrastructure attacks
Iraq's oil production has yet to reach levels attained before the US-led invasion of 2003 as the country struggles with sectarian fighting and attacks on its energy infrastructure.
Mexico's production has fallen below three million barrels a day since October as Petroleos Mexicanos, the state-owned oil company, failed to compensate for a 30pc drop at Cantarell, its largest field, which accounts for 40pc of output.
"There are supply constraints with many producers, especially from non-OPEC countries, struggling to find new reserves. And in China and the Middle East, demand keeps growing," said Victor Shum, senior principal at energy consultant Purvin & Gertz Inc in Singapore.
"The fundamentals are prompting investors to get into oil in a big way and all that points to higher prices.''
Spare production capacity of the Organization of Petroleum Exporting Countries (OPEC) is low and the group's exports may fall because of "lacklustre" supply growth and rising domestic consumption in member countries, the Goldman analysts said.
"Non-OPEC supply is struggling to grow, with notable declines being seen in Mexico and Russia showing signs of rolling over following an extended period of rapid growth," said the analysts from Goldman, the world's biggest securities firm by market value.
Prices are also poised to gain as major oil-exporting countries restrict foreign investments, limiting supply growth, while demand from developing countries, or "non-OECD" nations ,is rising on the back of economic expansion and power shortages.
It all prompts higher demand for gasoil and fuel oil, the Goldman analysts said.
Crude oil for June delivery was trading at $120.47 a barrel, up 50 cents, at 8:42 am in London in after-hours trading on the New York Mercantile Exchange. Yesterday, futures closed 3.1pc up at $119.97 a barrel, the highest closing price since trading began in 1983.
"The core of our super-spike view has been that a lack of adequate supply growth coupled with price-insulated non-OECD demand growth" is leading to higher prices, the analysts said. That could result in a "sharp correction in oil demand", the Goldman analysts said.
Crude oil's increase above $100 a barrel was partly because of the dollar's decline against the euro, which boosted oil prices.
It made commodities cheaper for buyers from outside the US and attracted investors as a hedge against inflation.
Oil in New York touched $100 a barrel on January 2.
Four months on, the US currency has declined 5.4 pc against the euro so far this year, and 11pc on last year.
Members of OPEC, which supplies about 40pc of the world's oil, have said that supplies are adequate and blamed speculators for pushing prices up to records.
The producer group won't consider raising output before it meets four months from now in September as the market is well supplied, Qatar's Minister for Oil Abdullah al-Attiyah said on May 2.
There's a fundamental misperception that so-called speculators are driving prices to unjustified levels, the Goldman analysts said.
"Unfortunately, we do not think the energy crisis will be solved by finding and punishing the big bad speculator."
Commodity investors, the Goldman analysts wrote, are "helping to solve the energy crisis" by speeding up the process for oil companies to spend more on energy projects and at the same time encourage greater efficiency.
(Bloomberg)
- Nesa Subrahmaniyan
