MARKET WATCHCrude prices continue to explore new highs

Crude futures prices continued climbing to new heights above $77/bbl July 14 amid growing speculation that the front-month crude contract eventually could hit $80/bbl and perhaps even as high as $100/bbl, as one group of analysts predicted more than a year ago.

July 17, 2006

3 min read

Sam Fletcher
Senior Writer

HOUSTON, July 17 -- Crude futures prices continued climbing to new heights above $77/bbl July 14 amid growing speculation that the front-month crude contract eventually could hit $80/bbl and perhaps even as high as $100/bbl, as one group of analysts predicted more than a year ago.

Analysts at Goldman Sachs Group Inc., New York, caused a stir in energy markets in April 2005 when they predicted crude futures prices could jump to $75/bbl in 2006 and spike at $105/bbl in 2007 before plunging back to $30/bbl by 2010. The Goldman Sachs equity team headed by analyst Arjun Murti hiked its "super spike" estimate to $50-105/bbl, from $50-80/bbl previously, because of continued strength in world oil demand and economic growth, especially in the US and China (OGJ Online, Apr. 1, 2005).

That prediction was dismissed at the time by some who described it as "highly sensational" and "unreasonable apart from some catastrophic event." However, it caused the front-month May contract to hit a then-record high of $57.70/bbl during the Apr. 1, 2005, trading session on the New York Mercantile Exchange.

Crude prices have been pushed steadily higher through the first half of 2006 by high demand levels in the US and China. Prices spiked through a series of escalating highs in the last four trading sessions amid expanding violence between Israel and Lebanon, the West's continued standoffs with Iran and North Korea over those countries' nuclear programs, and reports of pipeline explosions in Nigeria.

Crude futures appeared to weaken in early trading July 17 on rumors that Israel's military offensive in Lebanon might end soon. However, prices rebounded a bit when the Israeli government refuted those reports.

"While higher gasoline prices threaten to attack US consumer confidence, it is wars in the Middle East that have historically had the biggest impact on consumer behavior," said Adam Sieminski of Deutsche Bank AG, New York. "The risk that the conflict in Israel could widen into the oil producing regions in the Gulf is finding its way into the energy markets. We continue to believe [West Texas Intermediate] is underpriced," he said.

Energy prices
The August contract for benchmark US light, sweet crudes set a new intraday record high of $78.40/bbl before settling at a record closing price of $77.03/bbl, up 33¢ July 14 on NYMEX. The September contract advanced by 47¢ to $78.71/bbl. Regular gasoline for August delivery gained 2.36¢ to $2.32/gal. Heating oil for the same month dipped by 0.39¢ to remain relatively unchanged at $2.08/gal.

The August natural gas contract escalated by 21.8¢ to $6.35/MMbtu, with the arrival of hot weather and several forecasts for above-average temperatures across most of the US this week. "Natural gas prices continue to trade cheaply compared to the rest of the energy complex," Sieminski said.

In London, the August IPE contract for North Sea Brent crude increased by 58¢ to $77.27/bbl. Gas oil for August inched up by $1.75 to $661.50/tonne.

The average price for Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes jumped by $1.33 to $71.71/bbl July 14.

Contact Sam Fletcher at [email protected].