Goldman Sachs sharply raises oil price forecast

By OGJ editors
HOUSTON, May 16 -- To balance worldwide economic growth with weak oil supply growth, oil prices will rise 14% in the second half of 2008, according to investment bank Goldman Sachs.

In a report released May 16, Goldman Sachs said the price surge is needed to balance global gross domestic product growth of 3.8% against oil supply growth of just 1%. The bank's average second-half 2008 West Texas Intermediate price forecast is now $141/bbl, up from a previous estimate of $107/bbl. The average WTI price in the third quarter is forecast at $135.30/bbl, rising to $145.60/bbl in the fourth quarter.

Long-dated oil prices need to rise at a rate that will force demand growth in line with supply growth. And despite expected price increases, a contango market—in which prompt-month futures prices are higher than prices in later months—is likely to return, according to the report.

"Although we expect inventories to build in May, which will further pressure WTI term structure, it is important to emphasize that we do not expect these softer fundamentals to translate into spot-price weakness given the strength in long-dated prices. Simply put, we expect the bullish structural market to dominate the bearish cyclical weakness, dragging the market higher."

High prices are required to achieve a needed slowdown in demand growth, as opposed to thinking about it the other way around, i.e., that weakened demand growth creates lower prices, Goldman Sachs said. "We estimate that the rise in oil prices since 2002 has already destroyed 5 million b/d of demand relative to if oil (had) stayed at $20/bbl."