Friday, May 16, 2008

Goldman Sachs: Fundamentals.

MarketWatch: Oil and gas producers lead London higher.


Goldman Sachs on Friday raised its forecast for the average price of West Texas Intermediate oil in the second half of 2008 by 32% to $141 a barrel from $107 a barrel.

"We believe that the market is not defying fundamentals but rather experiencing a structural re-pricing much like it did in 2004, searching for a new equilibrium against an uncertain long-term supply environment," the broker said.

Bloomberg: Goldman Raises Second-Half WTI Oil Forecast to $141.


``Supply constraints and a lack of scaleable substitutes are set to continue driving the long end of the oil curve higher,'' Goldman analysts including Peter Oppenheimer and Jeffrey Currie in London wrote in a report dated today.


The trend in the growth of oil supply has fallen to 1 percent per annum, compared with global economic growth of about 3.8 percent, today's Goldman report said. ``Given this imbalance, long-term oil prices will need to rise.''


The near-term oil market is being driven by ``long-dated'' prices, or the price of oil for delivery 5 years forward, Goldman said. While an increase in U.S. stockpiles and declining demand growth due to the global economic slowdown is creating ``near-term fundamental weakness,'' this is not causing lower prices, according to the bank.

``We do not expect these softer fundamentals to translate into spot price weakness given the strength in long-term prices,'' according to the report. ``We expect the bullish structural market to dominate the bearish cyclical weakness.''

Supply Constraints

Goldman said it was unlikely prices would eventually rise enough to justify large scale investment in alternative sources of fuel, thereby offsetting the discrepancy between supply and demand, because of resource protectionism which constrains supply growth.

Instead, an increase in long-term oil prices is required to suppress demand growth and bring it in line with supply growth, Goldman said. It forecasts the long-date oil price to rise 14 percent to $148 a barrel by early next year.

``Long-term oil prices will need to continue to rise to bring trend oil demand growth in line with trend supply growth,'' the bank said. ``Eventually a price will be reached which incentivizes significant conservation, new technologies and political solutions which will eventually cap the price rises.''