Goldman Sachs' 'Super spike' runs up energy prices

Sam Fletcher
Senior Writer

Energy prices shot up on Mar. 31 after equity analysts at Goldman Sachs Group Inc., New York, predicted that crude could spike to $105/bbl at some point in the next few years.

The team headed by analyst Arjun Murti hiked its "super spike" estimate to $50-105/bbl, from $50-80/bbl previously, because of continued unexpected strength in world oil demand and economic growth, especially in the US and China. The group also said retail gasoline prices could hit $4/gal during the multi-year "spike" period until high prices force a reduction in oil consumption.

The May contract for benchmark US light, sweet crudes shot up to $56.10/bbl during trading Mar. 31 on the New York Mercantile Exchange before closing at $55.40/bbl, up by $1.41 for the day. Gasoline for April delivery jumped by 5.88¢ to $1.65/gal on NYMEX.
Prices continued to climb Apr. 1, with the May crude contract hitting a record high of $57.70/bbl on NYMEX before closing at $57.27/bbl. The May gasoline contract also topped at a new high of $1.76/gal prior to settling at $1.73/gal on NYMEX after the Energy Information Administration reported that the US gasoline market was tightening at a faster pace than previously anticipated.

On March 30, EIA reported that commercial US crude inventories escalated by 5.4 million bbl to 314.7 million bbl during the week ended Mar. 25. However, gasoline stocks dropped by 2.9 million bbl to 214.4 million bbl in the same period. Distillate fuel fell by 1.1 million bbl to 103.4 million bbl. While most of the distillate decline was in diesel fuel, heating oil also diminished.

'Froth' spurs talk
Goldman Sachs' prediction of $1.05/bbl crude far outpaces the expectations of many other energy analysts. Robert S. Morris, Banc of America Securities, New York, dismissed it as "highly sensational." Such a price spike, he said, "is highly unlikely and unreasonable apart from some catastrophic event."

Nonetheless, he said, "The 'froth' surrounding such speculation is likely to prompt [the Organization of Petroleum Exporting Countries] to reinitiate talks to boost output targets by another 500,000 b/d."

"This morning, [benchmark US] front-month crude oil futures are trading above $58/bbl, a new all-time intraday high. Against this background, OPEC said over the weekend that it stands ready to announce another increase in production quotas," said analysts Apr. 4 in the Houston office of Raymond James & Associates.

Ahmad Fahad Al-Ahmad Al-Sabah, Kuwaiti oil minister and OPEC's conference president, told reporters in Kuwait on Apr. 4 that 2 days earlier he initiated consultations with other OPEC member on the possibility of hiking the group's output ceiling by another 500,000 b/d. On Mar. 16, OPEC immediately raised its production quota by 500,000 b/d to 27.5 million b/d, less than the group's previously acknowledged production level of 27.7 million b/d among the 10 affected members, minus Iraq.

Al-Sabah said OPEC ministers agreed to watch the price trend for 2 weeks before deciding whether to increase the quota to 28 million b/d. Any new increase likely would not come until May, he said.

Natural gas prices climb
Meanwhile, The May natural gas contract escalated by 19.3¢ to $7.65/MMbtu on Mar. 31 and continued climbing to $7.75/MMbtu Apr. 1 on NYMEX, "on a firm crude oil market and bullish technicals [trades encompassing a wide range of charting techniques involving an index's price, cycles or volatility], as [investment] funds drove the energy complex to new contract highs despite a neutral weekly EIA inventory report and fairly mild weather that has slowed demand," said analysts at Enerfax Daily. "This is one of the occasions where the volatile combination of technicals and funds drive the market well past its normal limits," they said.

EIA reported Mar. 31 that 51 bcf of natural gas was withdrawn from US underground storage during the week ended Mar. 25. That compared with a draw of 89 bcf the previous week and 18 bcf during the same period a year ago. US gas storage now stands at 1.2 tcf, up by 222 bcf from a year ago and 206 bcf above the 5-year average. That "appears to reflect some incremental backed-out demand vs. the prior week, although the correlation to heating degree days begins to weaken as winter comes to an end and the shoulder period begins," said Morris.

With the end of the traditional withdrawal season in March, natural gas storage injections in early April could benefit from the strong economic incentives from the current spread between the spot market cash price and the outer-month NYMEX futures contract price, Morris said.

(Online Apr. 4, 2005; author's e-mail: samf@ogjonline.com)

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