Goldman Analysts Deliver Oil Shock
Prediction of 'Super Spike'
As High as $105 a Barrel
Puts Jolt in Crude Futures
By PETER A. MCKAY
Staff Reporter of THE WALL STREET JOURNAL
April 1, 2005
In the energy boom of recent years, Goldman Sachs Group's influence has grown in myriad ways. For starters, it runs one of Wall Street's most active energy-trading desks and owns a closely watched commodity index heavily weighted toward crude oil.
Yesterday, it was a different group within the investment bank -- the equity analysts -- that shook up the commodity markets. A team led by analyst Arjun N. Murti repeated its assertion that the oil market is going through a "super spike" and raised the upper range of its price forecast for such a spike to $105 a barrel.
The report helped send the most active crude futures for May delivery soaring to $55.40 a barrel, up 2.6%, or $1.41, at the New York Mercantile Exchange. On the year, prices are up 28%.
For commodity watchers digesting Goldman's statements, the report also seemed to touch on several sore spots. Should the market focus on oil inventories or production capacity? Or are both equally important? Are Wall Street stock analysts, who tend to think crude prices are headed sharply lower, too apt to rely on outdated views of the world? Or are the analysts at pure commodity-brokerage firms, who tend to think prices will stay high or go up, overstating their case?
"I think the oil market is unique in the world in having this obsession with spare capacity," said energy analyst Tim Evans, of IFR Markets, a unit of the research firm Thomson Financial. "In any other commodity market, people just produce as much as they can to meet the demand, especially at a high price, and that's it."
The premise of Goldman's market-moving report was that the gap between global supply and demand -- these days there are less than two million extra barrels a day in a world that uses more than 80 million barrels daily -- will remain tight for years to come. In turn, prices will remain sensitive and rise to the point where consumers -- who so far have shown little reaction to prices above $50 a barrel -- will finally cut back their consumption, restoring more of a price cushion. Goldman, which previously estimated that price between $60 and $80, revised the range to $50 to $105.
The problem with that scenario, say dissenters like Mr. Evans who expect prices to fall back below $30 a barrel, is that crude storage is rising, regardless of the daily swing in spare capacity. According to the Department of Energy, U.S. crude inventories are at 314.7 million barrels, up about 8% on the year. That extra oil should push prices down, they argue.
Mr. Murti's Goldman team, which declined to be interviewed for this article, also anticipated retail gasoline prices of $4 a gallon during the "super spike," cutting deeper into Americans' purchases of energy-hungry sport-utility vehicles. And the Goldman analysts increased 2005 and 2006 earnings estimates for all 42 of the U.S.-traded energy companies that they cover, sending those companies' shares higher.
Such bullish oil-price calls are rare among Wall Street stock pickers these days, even those who cover the energy industry. Stock analysts often assume that the price of oil will revert to its historical mean after a spike, which is why many of them -- Goldman's analysts being a notable exception -- expect oil to drop again soon.
Many stock analysts think a "super spike" is unlikely. "Of course we could go to $105, if Saudi Arabia's reserves were destroyed," said Wachovia Securities analyst Jason Schenker. "But the probability of that is so low, it's not worth publishing on the front page of a report."
Like Goldman, Mr. Schenker agrees that oil will average about $50 a barrel this year and doubts that it is at risk of falling far below $40. But he also agrees with some critics who see the oil frenzy as looking a little bubbly. "This is Dow 20,000," he said, referring to some forecasts made during the stock market's "super spike" during the late 1990s.
Those analysts who focus exclusively on the commodity itself also tend to be bullish on the oil price -- but few would match Goldman's prediction. Energy analyst Jan Stuart, of the commodity brokerage firm Fimat USA, believes the price could hit $60 this summer. Over the next 12 months, he said prices could hit $80. He stops short of calling for a three-digit price. |
