Apr 1/05 - On possible implications of $100/barrel oil

PMBComment: skepticism aside how does HRH Hugo Chavez, Bolivarian Ruler for Life, sound? Will Jose Vicente and extended family displace the Waltons from the Forbes Billionaires list? If Goldman is right, both scenarios might not be far fetched. We might actually start wishing for the good old days in Venezuela when our oil basket reached $7.90/barrel. PMB

Los Angeles Times

Oil Surges After 'Spike' Prediction. A Goldman analyst says crude could reach $105 a barrel in 2007. Other experts are skeptical.

By Jerry Hirsch
LATimes Staff Writer
April 1, 2005

Oil and gasoline prices surged Thursday after a Wall Street analyst warned of a coming "super spike" that could send crude to $105 a barrel.

Light sweet crude for May delivery jumped $1.41 to $55.40 a barrel on the New York Mercantile Exchange, $1.32 shy of the record close on March 18. Gasoline for April delivery closed at a record $1.655 a gallon, up 5.88 cents.

In a report to investors, Goldman Sachs Group Inc. analyst Arjun Murti said surprisingly high demand in the U.S. and China combined with a lack of infrastructure to get oil out of the ground had created a supply imbalance that could be corrected only by dramatically higher prices — which in turn would depress demand.

In Murti's super-spike scenario, he estimates that the cost of a barrel of oil will rise to $75 next year and $105 in 2007 before gradually sliding back to just $30 by 2010 as high prices spur investment in oil and cause demand to shrink. But Murti also issued a more conservative forecast in which he raised the investment bank's 2005 and 2006 crude price forecasts to $50 and $55, respectively, from $41 and $40.

A near doubling of crude prices would translate into $4-a-gallon gasoline, a level Murti believes would coax U.S. consumers to conserve enough to break the price cycle.

Indeed, $4 a gallon would be an unprecedented price, even after adjusting for inflation. The nearly $40-a-barrel oil that rattled the world in 1980 would top $90 in today's dollars. And gasoline that cost $1.35 a gallon 25 years ago would cost $3.20 in today's currency.

Such a run-up would send shares of oil and gas companies soaring by 80% or more, Murti said. Goldman Sachs' top picks include Exxon Mobil Corp., Amerada Hess Corp., Murphy Oil Corp, Suncor Energy Inc., EnCana Corp. and Devon Energy Inc.

Phil Flynn, a senior analyst at Alaron Trading Corp. in Chicago, said he was skeptical that prices would rise as high as the Goldman Sachs analyst projected, even though "there is no sign that demand is slowing."

"It would take some sort of supply disruption such as a terrorism incident in Saudi Arabia or Venezuela deciding it did not want to export to the United States," Flynn said.

Tom Kloza, chief oil analyst for the Oil Price Information Service, likened the research report to technology analyst Henry Blodgett's astronomical price targets for Nasdaq stocks in the 1990s that helped to push those prices higher. Goldman Sachs is one of the biggest energy traders on Wall Street and maintains the Goldman Sachs Commodity Index, which is three-quarters energy.

Murti's report comes at volatile time, when traders are looking for almost any reason to bid up prices, Kloza said. At one point during the trading day, he said, a fire drill at a ConocoPhillips refinery in New Jersey spooked traders, creating a brief increase in gasoline futures.

"A lot of this is being driven by crowd behavior," Kloza said.

On Wednesday, the U.S. benchmark oil price fell 24 cents to $53.99 a barrel after the Energy Department reported that the nation's crude inventories rose more than expected. Persistent concerns about the ability of producing nations to keep pace with rising demand have kept a floor under crude prices, which have jumped 27.5% this year.

Mark Baxter, director of Southern Methodist University's Maguire Energy Institute in Dallas, said he wouldn't be surprised to see oil prices rise to $65 to $75 a barrel by the end of this year, "assuming continued moderate economic growth and a calm geopolitical environment."

Baxter believes, however, that high gasoline prices are already starting to change consumer behavior domestically and will start to soften demand.

Although brief and dramatic surges for any commodity are always possible, said Philip Verleger Jr., an energy economist with the Institute for International Economics, the prospect for any sustained period of oil prices near $100 a barrel remains slim because the high costs set the stage for lower prices.

"The global economy couldn't cope with it," Verleger said. "It would cause a serious recession or worse in the United States. China would lose its best market, India and Europe would suffer, and demand would crash. We would be back to $20 oil."