Super Spike: Oil will touch $105, says report
TIMES NEWS NETWORK [ SATURDAY, APRIL 02, 2005 12:35:40 AM]
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MUMBAI: A report by Goldman Sachs’ oil analysts predicting a super spike in oil prices to $105 a barrel is making waves in international oil markets.
The report predicts that oil markets may have entered the early stages of a “super spike” period, which is a multi-year trading band of prices high enough to reduce energy consumption and recreate spare capacity. Lower energy prices will be restored after this phase, the report predicts.
Goldman Sachs has upped its ‘05 and ‘06 forecasts for WTI spot oil prices to $50 a barrel and $55 a barrel, respectively, up from $41 a barrel and $40 a barrel.
World oil prices have more than doubled since early ‘02. Adjusted for inflation, however, they remain far below levels reached in the wake of the 1979 Iranian revolution when prices surged upwards of $80/barrel in today’s money, oil traders here said.
According to the report, the higher forecasts are being made because of a combination of oil demand growth, and a premium for light sweet crudes such as the WTI relative to heavy sour crudes. The increase in the industry cost structure is also being cited as a factor.
However, oil industry officials say the fundamentals do not support such high prices. “Prices over $50 are unsustainable. Prices will probably stabilise at $50/barrel for WTI and about $47/barrel for Brent, BPCL executive director SK Sharma, who heads the company’s international trade division told ET.
Contrary to general perception, the report also suggests that speculation, ie, hedge fund activity, has played a negligible role in global oil markets beyond day-to-day trading noise.
From the perspective of oil markets, the current environment is similar to the ’70s than the ’80s or ’90s. During the ’70s, the world experienced an extended period of very high oil prices, stagflation, the fall of the Shah of Iran, an Iranian hostage crisis, the fear that the world was running out of oil, two major Arab oil embargoes, and a deep global recession.
The combination of these events caused a multi-year decline in oil demand, which, when combined with continued supply growth, led to an extended period of overcapacity and lower prices which recently ended.
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