Thursday, July 7, 2011

Oil to climb on growing demand, reduced spare capacity: Goldman

London (Platts)

Global banking and securities firm Goldman Sachs said Thursday it was expecting considerable oil price upside in the next 6-12 months as rising demand fueled by improved global economic growth cut into OPEC spare capacity.

"With world economic growth continuing to drive oil demand growth well in excess of non-OPEC production growth, the oil market continues to draw on inventories and OPEC spare capacity in order to balance," Goldman Sachs said in its Commodity Watch report.

"In our view, it is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand, keeping it in line with available supply."

As such, Goldman Sachs has now forecast a WTI crude price of $111.00/b in three months, $115.00/b in six months and $126.50/b in 12 months, this compares with $108.00/b, $114.50/b and $126.50/b forecasts from its May 24 Commodity Watch report.

For Brent crude, Goldman Sachs said its three, six and 12-month forecasts were now to $117.00/b, $120.00/b and $130.00/b. In its May 24 report Goldman had forecast prices of $115.00/b, $120.00/b and $130.00/b, respectively.

"We continue to expect that oil demand growth fueled by moderate economic growth expectations will be sufficient to draw down crude oil inventories and OPEC spare capacity by early next year, leading to considerable oil price upside on a 6- to 12-month horizon," Goldman said.

At 0825 GMT, the front-month August NYMEX crude futures contract was trading at $97.27/b, while front-month August ICE Brent futures were $114.38/b.

Goldman also said the impact of the recent International Energy Agency agreement to release 60 million barrels of oil onto the market to compensate for lost production out of Libya would only be short-lived.

"As details of the release have begun to be made available, it is now clear that only about two-thirds of the release of 60 million barrels will be through a sale from government-controlled inventories that would otherwise be unavailable to the market. Further, the impact of the release is likely to be substantially more muted as time goes on," Goldman said.

"On net, while this oil will moderately increase near-term supply availability, it does little to alter inventory levels and the trajectory of crude oil prices over the medium-term." For the products market, Goldman Sachs has forecast an RBOB gasoline price of $2.89/gal in three months, $2.95/gal in six months and $3.35/gal in 12 months, down from $2.96/gal, $3.94/gal and $3.36/gal in their May 24 outlook, while USGC heating oil has been forecast at $3,12/gal, $3.26/gal and $3.48/gal, compared with the earlier forecasts of $3.04/gal, $3.24/gal and $3.47/gal.

"Gasoline inventories have recovered from their very low levels in April and early May while gasoline demand has picked up markedly as we entered the summer driving season, supported by a substantial decline in retail prices which have dropped almost $0.40/gal since the peak in early May," Goldman said, adding that ongoing strong gasoline cracks reflected the weakness in WTI prices rather than strength in gasoline.

For heating oil, meanwhile, Goldman said that while US distillate stocks started the year well above last year's levels, inventories have declined sharply over the course of the year and have so far lacked the typical seasonal increase over the past weeks.

"This supporting trend is driven primarily by strong export demand from Latin America and increasingly Europe rather than domestic demand, which remains well below last year's levels," Goldman said.

"We expect this export demand to continue this summer, likely supported by diesel-fired electricity generation demand in China and Japan."

--Geoff King,

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