WTF Headline off the Day? GS Says Oil ‘Likely’ to Reach $150-$200

Today’s WTF headline isn’t a criticism of the financial media so much as a disturbing forecast:

Goldman’s Murti Says Oil `Likely’ to Reach $150-$200
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 today on speculation demand will rise during the peak U.S. summer driving season.

>

Before you blow the guy off as an energy extremist, his $105 target 3 years ago was widely derided ("another Henry Blodget wannabe").

It turns out he was way too conservative — The price shot $16 higher than his "ridiculous" target, and a year earlier than forecast.

I am not saying we are going to see $200 oil, but do not be too quick to blow off Murti.


>

Source:
Goldman’s Murti Says Oil `Likely’ to Reach $150-$200   

Nesa Subrahmaniyan
Bloomberg, May 6 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=ayxRKcAZi630&

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Boiled Frog commented on May 6

    I just heard demand was down for oil and there is a high level of inventory. So what is causing the price to go up?

    Oil is hard to find and more expensive to extract. The peak oil books I have read have been stunningly accurate.

  2. Nihilism commented on May 6

    On a diffrent but similar note:

    India is reportedly considering a ban on futures trading in food commodities, as the government struggles to curb soaring inflation and the rising cost of food has become a major international concern.
    India’s finance minister Palaniappan Chidambaram said Monday that he was considering a blanket ban on trading in food futures, according to a report in The Financial Times.

    Chidambaram said that governments across Asia share his worries over speculation in the commodities markets, the FT reported.

    http://www.marketwatch.com/news/story/india-may-impose-ban-trading/story.aspx?guid=%7BEAC28F62%2DED89%2D4EB1%2DBD66%2D832D3FFA96F0%7D

    I bet if you start sending some of the “free market” analysts at Goldman/wall street, hedge funds, accredited investors, CTAs and all the folks hoarding/rolling futures contracts with leverage, to guantamo bay jail, may be commodity prices will start coming down.

    Politicians in “3rd world countries” are corrupt but I wonder what can people here do when the “whole free market system” is corrupt and manipulated to benefit a few who are “hedging” to cushion their deflating dollar based assets

  3. Ross commented on May 6

    BLACK GOLD. TEXAS TEA.

    Live with it. Or live without it. Your choice.

    What is really really scary is food cartels.
    The world has been blessed with abundant food supplies that can more or less freely move to areas of distress. Lock up food supplies and you get a recipe for war.

    Those of you that blame speculators for high commodities prices need a refresher in econ 101. Supply and demand. It’s the law.

  4. Zachary A. commented on May 6

    “We believe the current energy crisis may be coming to a head, as the lack of adequate supply growth is becoming apparent.” – Murti

    If this is correct, it is hard to imagine where any new supply is going to come from given the low productivity of state run oil companies and the high cost and regulations to production for private oil firms. Furthermore, any capital investment by private firms would most likely not yield any more supply for years and I would imagine any productivity gains from state run companies would not increase supply overnight.

  5. Tom F. commented on May 6

    If the government is not willing to get the hedge funds out of the commodities markets $200/bbl will be a piece of cake.

  6. brasil commented on May 6

    puposeful shut in supply + environmental extremists + Wall St/speculator leverage + inept government oversight = the same thing as the housing crisis…

  7. Lilguy commented on May 6

    The price of oil will continue to rise until we are no longer addicted to it because new supplies are increasingly hard to find. $150-200/barrel won’t be a “spike,” it will simply be points along the rise of oil prices until demand diminishes substantially. And I haven’t seen anything in the US or any other major oil consuming country that is likely to make that happen. Indeed, slack in US demand for the moment is more than offset by increases in demand in the developing world, especially China.

  8. brasil commented on May 6

    disagree on oil ..what if all the oil producers like a 55 year old man who hasn’t saved enough…realise’s this is it ..I have 10 years till retirement and have to maximize my income..

  9. John L commented on May 6

    Barry,

    Your comments on Murti’s forecast are correct – don’t dismiss them too quickly. GS has a couple of top notch energy economists behind him that have an excellent track record of getting the fundamental picture correct. Their forecasts are based on solid supply and demand forecasts and they usually hit their medium-term predictions.

    I believe that oil can go to $200 in the next two years, simply because new supplies are failing to offset declines in existing production fields. With global demand continuing to increase, and no near-term significant supply increases, the picture is truly disturbing. An un-intended consequence of the improvements in production technology has been a more steep decline rate in field production rates. However, at some point the usual feedback mechanisms of demand destruction will have to kick in and bring both demand and prices down (which is what the Saudi’s have traditionally feared the most). The question is how much further will prices have to rise before demand gets stifled (typically coinciding with global recession)?

  10. Donny commented on May 6

    There’s so much hype here … what’s to stop any firm from saying 300 a barrel by the summer. BASED ON WHAT? The increasing beta on demand is more hype than fundamental.

  11. techy commented on May 6

    even though oil may go down in the short term due to gov bullying the oil cartel, i am a bit bullish on oil in the long run.

    and it does appear that supply is constrained and demand is constant.

    remember that in most countries people already pay $4-$6 a gallon for gas.

    and most countries per capita income is less than USA.

    if oil is really in short supply, then its going to become a luxury only affordable to rich people (in india its true to a large extent, with minimum wage stil around $80 per month and gas being almost at $4.5/gallon).

    but demand in usa will fall off a big time when gas reaches around $5-6/gallon……USA will change its habit and adopt like rest of the world(living near work,shopping near home and no frequent long drives for recreation/vacation)

    i think $150-$200 is feasible, in the next 1-3 years(unless world economy shrinks and goes into depression)

  12. Zachary A. commented on May 6

    Supply may be easier to find and refining bottlenecks would be lessened if the regulatory burden on oil companies and refiners was reduced. Currently, this is unpopular amongst politicians given the high profits of Exxon, BP, Shell, and the like; however, as energy prices continue to rise I would have to think that even politicians will heed the call for more supply and diminish these burdens. If or when this day comes is when the “peak oil” theory will be tested.

    An obvious flaw to my analysis is that I ignored the huge demand increases in emerging economies, which in part are due to government subsidies; however, there seems to be little that can be done on this front. Thus, prices could still rise even in the event of more supply.

  13. christofay commented on May 6

    Oil company profits have been high and have been for a while. This has to mitigate the boogeyman of high costs due to govt regulation. Can you guys carping on govt reg and environmental conservatives (like Teddy Roosevelt) give an example of how much govt reg adds to the cost of a new plant?

    I believe the points to watch are crack spreads, the differential between the price of crude and products which is tight. You would have to consider the long term potential of widened crack spreads to consider investing in new plant. How much large scale capital investing are we doing in the U. S. in any industry? I can only immediately of a Intel type chip plant for a few billion dollars in investment. What are we investing to produce in the States? That’s a dismal big picture, true for oil refining. If the potential isn’t there, perhaps the majors even considering the cost of govt reg have decided not to invest.

    If space is scarce due to not in my backyard concerns, I nominate Dick Cheney’s shoreside Maryland estate. That’s snark.

    On the other hand, perhaps big oil can hold off on investing in new plant till it’s subsidized by the govt. Consider where we are in regard to investment banks and who the vice pres is before saying noooo. That’s more snark.

    Supply restraints are fine to big oil. The C-suite is enjoying good profits, bonuses are deep. That’s the market.

  14. Quarter Short commented on May 6

    All this guy is really saying is that the dollar will continue to fall over the next two years.

    Supply and demand? Yeah, but not oil, dollar bills.

  15. wunsacon commented on May 6

    Talk about “entitlements”. Why do so many consumers, including many Americans, think it’s their god-given right to:
    – chauffeur their kids around their county to attend baseball/soccer leagues, instead of making them walk or take the bus?
    – drive everywhere themselves instead of taking the bus or riding a bike?
    – consume oil @ only $100/barrel, while many of the people who pump the oil are just getting food and medical care?

    If Americans don’t like it, we can start drilling on our continental shelves, take the bus, and buy solar panels instead of LCD’s.

    This country:
    (a) consumes more oil than other countries
    (b) produces fewer goods for that oil than other countries
    We’re plainly inefficient with energy. In turn, that means we’ll lose in a global competition to “produce the most with the least inputs”.

    The price will rise in USD until that imbalance ends.

    Sorry. But, even if this situation improves temporarily, this country better wake up.

  16. bobn commented on May 6

    Goldman-Sachs is an inherently corrupt organization, as shown by them simultaneously packaging and selling-short on mortgage securities.

    Doubtless, they are talking their own book.

    Doesn’t mean they are wrong, though.

  17. johnnyvee@yahoo.com commented on May 6

    $200 bbl for oil begs the analysis of: (1) How is Wal Mart and all other retail businesses going to survive high energy/transportation costs? Most business models rely on cheap and abundent energy. (2)At what point does free markets fail. Meaning, most oil reserves are nationalized and at what point will these oil nations ceases selling to the USA. It’s happened before and it will happen again.

  18. Graffiti Grammarian commented on May 6

    Wunsacon is right. Goldman always talks their book. They must have a lot of long exposure on oil.

  19. wunsacon commented on May 6

    FD: I was/am talking my book.

  20. Moose commented on May 6

    I know Arjun well and respect his work (always quality, not quantity).

    I agree that the oil price is going to rise to a level where it starts to impact demand. $150 will have a marginal impact to demand. $200, much more significant.

  21. DownSouth commented on May 6

    ☺☺”…puposeful shut in supply…”
    Posted by: brasil | May 6, 2008 10:19:19 AM

    Where?

    Prove it.
    ————————-

    “Saudi Arabia is the world’s only true custodian of spare capacity. The kingdom is currently pumping a little over 9 million barrels a day, according to Dow Jones Newswires estimates….”

    “While spare capacity still gives Saudi Arabia unique power to sway the market, the structural shift in global energy demand limits its ability to conceivably push oil prices down to historic lows…”

    “Naimi in April said Saudi Arabia was putting off a plan to expand oil capacity beyond 12.5 million barrels because of concerns about demand growth. ‘Unless we see really genuine demand, we have to pause right now and see what happens,’ Naimi told Petroleum Argus.

    “Some energy analysts say the Saudi move suggested a more sober outlook on oil prices. ‘If they see a lot of risk on the demand side then you could see very low prices and potentially a lot of underutilized capacity down the road,’ said Ken Medlock, a fellow at Rice’s Baker Institute.”

    “But former U.S. Ambassador Oberwetter said the pause in the expansion may reflect Saudi Arabia’s view of the limitations in its own supply at a time when all companies, including Saudi Arabia Oil Co., have been forced to spend record amounts to raise volumes.”
    http://www.cattlenetwork.com/Content.asp?ContentID=218898

  22. AGG commented on May 6

    There are some seriously mathematically challenged individuals here. Heading the list are the peak oil fanatics.
    Take my power company as an example. The electrical energy they produce comes from the following sources:
    1) 47.46% Hydro
    2) 37.78% Nuclear
    3) 8.52% Market Power
    4) 4.34% Wood
    5) 1.88% NATURAL GAS AND OIL
    6) 0.02% Wind

    What PERCENTAGE of the oil we use is imported? Now, after you have appropriately computed the effect on local prices of the imported prices, then compute local prices on the percentage effect on your energy products breaakdown. Anyone who is computing a one for one increase on local supplies makes chicken little look like the Prudent Bear.

  23. BostonObserver commented on May 6

    http://online.wsj.com/article/SB121002229576468609.html

    From today’s WSJ:

    Tracking Saudi Oil From Space
    Satellites Check Big Field’s Health;
    Jitters Over Supply
    By NEIL KING JR.
    May 6, 2008; Page A15

    At a time of high anxiety over soaring fuel prices and scarce supplies, oil analysts are resorting to satellite imagery to crack one of the industry’s biggest unknowns — whether Saudi Arabia’s massive Ghawar field is slipping into depleted old age.

    Saudi Arabia has long contended that its famed Ghawar field, responsible for around 7% of global supply, remains in fine shape and will continue to churn out around five million barrels a day for years.

    But Saudi Arabia doesn’t publish data to back that up. Skeptical analysts in the West insist the field is in decline, an event they say presages a peak in world oil production.

    Analysts at Sanford C. Bernstein Ltd., a New York-based investment research firm, just spent months trying to resolve the debate. Their tools? Cameras fixed to satellites that hover miles above the Saudi desert.

    Combing through dozens of high-resolution satellite images of Ghawar going back to 2001, the Bernstein team has concluded in a study sent to clients at the end of April that only part of the vast field “is suffering signs of old age.” On the whole, Bernstein says, the field “is being properly managed” and is experiencing only “mild production-decline rates at worst.”

    Critics of the study, including some who have crunched their own overhead imagery, say the Bernstein study is insufficient and the debate over Ghawar’s health is far from over.

    “This is junk science,” says Houston investment banker Matthew Simmons, who insists that only detailed, on-the-ground records can speak to the field’s real condition. Mr. Simmons’s 2005 book, “Twilight in the Desert,” cited technical papers to argue that Ghawar and Saudi Arabia’s other giant fields were showing signs of increasing stress and would soon slip into decline. Mr. Simmons is a well-known proponent of the theory that world-wide oil production may already have hit its all-time peak.

  24. flipper commented on May 6

    AGG – it does not matter what the fundamentlas are.

    There is a sound story of EM demand. Nobody cares that OECD demand is falling. Nobody cared last year that Japan’s imports were at 50 years low. Nobody is trying to estimate potential impact of savings and new tecnologies.

    It’s just castles in the sky, as always. And oil can hit even $200 without ANY fundamental support – if pension funds and real money will continue to “diversify portfolios”.

    If you invest half a trillion dollars in the commodities, put on top one ongoing and one coming war in Middle East, put on top of that US and China filling in strategic reserves, some strike in Nigeria, etc – now you get it, 122$.

    Put on top of that dehedging oil companies and say another half to trillion dollars investments coming over next couple of years (the rate of inflow increases is exponential) and 200 is a piece of cake.

    It’s a growing bubble, but no reason to think it will end anytime soon.

  25. Darkness commented on May 6

    “Those of you that blame speculators for high commodities prices need a refresher in econ 101. Supply and demand. It’s the law.”

    How so? There is the law of “remaining in power at all costs” that is far stronger than greed. If the hoi poi run out of food, the leaders tend to end up roasted and skewered, and the leaders around the world are well aware of that. Hence hording that ignores all rules of supply and demand.

    “even though oil may go down in the short term due to gov bullying the oil cartel, i am a bit bullish on oil in the long run.”

    Bullying the Saudis only increases the supply of heavy, sour crude, which the U.S. can’t use since can’t refine it. All crude is not equal. The U.S. refining capacity is for West Texas Light Intermediate.

  26. rickrude commented on May 6

    Yap, yap, yap, one can ponder the reasons
    to infinity. Have you guys got some doe
    on the oil stocks ??

    I have a warm feeling in my gut these days as my portfolio of oil stocks finally are moving up.

    What is the point of all the analysis, dogma about the oil market if you did not make bets on it ?? just another talking head.

  27. jjr commented on May 6

    AGG you need to exit your glass house if you’re going to stride up on your soapbox and make claims like thus, “There are some seriously mathematically challenged individuals here. Heading the list are the peak oil fanatics.”

    Start by checking where petroleum products are used. Sure you can pull your power company as an example, but that doesn’t make it a useful one. Petroleum is used first and foremost in transportation and not power generation. Get over yourself.

    I also don’t think any believer in the hypothesis of peak oil would label his or herself a fanatic. Such a term implies that they’re cheering it on, when just the opposite is true. Call them Cassandras perhaps, but really your verbiage bespeaks an ill-informed dismissive attitude instead of any well-reasoned critique. An interesting thing about the most loud proponents (if you will) of peak oil is that the demographics skew towards mathematicians and geologists. You’re barking up the wrong tree attacking these people for their mathematical proficiency, unless you happen to be among their peers. Even then, this topic has been heavily peer-reviewed already. The biggest problem is a lack of certifiable data, so to a large degree they’re dealing with models and probabilities.

  28. jjr commented on May 6

    Actually, you could call Kunstler a Peak Oil fanatic and probably be accurate. I just call him Gloomy Gus.

  29. Tomas commented on May 6

    Half of the people predicting the direction oil prices are going to move are going to be right. Doesn’t make them prescient.

  30. dave54 commented on May 6

    150/200 for a barrel-of-oil seems more reasonable than 1500/2000 for an ounce of gold.

  31. Agoracom commented on May 6

    Barry, here are two more very reputable calls for $200 oil back in November. They link to my blog but I used TinyURL to avoid bad formatting:

    Barron’s #18 Hedge Fund Manager – Jean-Francois Tardif
    http://tinyurl.com/4r5jvq

    Jim Rogers
    http://tinyurl.com/5lbrgw

    Maybe we should all start talking about ways to profit from this trend to at least cover the extra $$ going into the gas tank.

    Regards,
    George

  32. FB commented on May 6

    AGG: There are some seriously mathematically challenged individuals here. Heading the list are people that don’t believe in peak oil.
    Take my state as an example. The electrical energy produced comes from the following sources:
    1) Petroleum 84%
    2) Other 16%

  33. rickrude commented on May 6

    I can’t believe the mathematic-academic-geniuses here.

    What is the purpose of all this complicated analysis, when in the end , you just complain paying at the pump and don’t invest in oil stocks or oil futures ??

  34. Robert- commented on May 6

    I bought a bicycle then sold my car… I win both ways… better health without gas.

  35. fiske silk commented on May 7

    I’m not sure Henry Blodget is the best reference here — and if it is, I’m not sure what that implies about the price of oil. Blodget’s $400 AMZN target came true, very shortly after he made it, but the internet economy was obviously overvalued. So, if I were to write this guy off as another Blodget, does that mean I don’t think oil will ever hit $200 or does it mean that I think oil will blow past $200 but ultimately settle back down somewhere to pre GWB price levels?

  36. flipper commented on May 7

    rick rude – it make no f sence to buy futures right now. Do a simple dcf, if oil stays there it is, without any more increases, oil and gas companies will be miles abd low-medium tax rates, such as Gazprom, KMG, etc. Even majors are bargarian if you believe oil is going to stay at current levels for years or go higher.

    The only risk is political backslash, which might be substantial.

  37. bitmo commented on May 7

    People keep saying “its supply and demand.” Do the work, though. Supply growth has been capped for various issues, but as in the past, this changes when prices get to a level making marginal returns more attractive. Above $70-80 a barrel, the economics make much more sense to extract unconventional oil. It has been less than a year, and unconventional production takes time. But if you look at the data, world production growth (yoy) EXCEEDED demand growth in Q4-07 and Q1-08, for the first time since 2005.

    Also keep in mind when you yammer on about Chinese oil demand that at least part of this “demand” is artificial, since the Central Govt has price caps on oil and oil products to combat inflation. What would real demand look like? This inflates global demand appearances and prices, to the “rest of world”‘s deteriment.

    The supply curve is shifting, as it has in the past. Demand is unreliable if you believe in China’s leading indicators. This is a bubbly house of cards.

    P.S. Check out the ties that Goldman Sachs has to the US Energy Administration…also don’t forget that Big Oil’s reciprocal circle-jerk with the Republicans.

  38. rickrude commented on May 7

    rick rude – it make no f sence to buy futures right now. Do a simple dcf, if oil stays there it is……………………….

    The only risk is political backslash, which might be substantial.

    Posted by: flipper | May 7, 2008 2:14:34 AM
    ?????????????????????????????????

    Ya but,folks here did not buy oil stocks last year or the year before when they had
    the chance . I’ve been posting for a while here staking my savings on oil stocks.

    If you guys did not want to buy before when it was cheap, and now don’t want to buy cause its expensive ,,, then join the talking heads on CNBC and CNN and vote for Hilary to hammer the oil companies….
    sour grapes I say

  39. R. Mooney commented on May 8

    An anarchic view but true.
    A spell on even a deserted island might restore sanity to politicians or even the financial eggheads. Looking at history however suggests that only revolution in thinking and action – all highly unlikely – will bring a modicum of salvation to a tsunami of profligacy.

Read this next.

Posted Under