Goldman Sachs SuperSpike Report Warns of $13 Gas, $105 Crude
Intelligence Press 3/31/2005
A new research report from Goldman Sachs sent energy prices through the roof
on Thursday by warning investors that the oil markets are entering into a
"super-spike" period that could see crude prices as high as $105/bbl. In
addition, the firm said Henry Hub natural gas prices could soar to $13/MMBtu
After the report hit the street, the energy futures complex popped higher.
At one point during the session, May crude was $2.11 higher than Wednesday's
$53.99 settle. Likewise, May natural gas peaked at $7.74, up 28 cents. April
heating oil hit a high during the day of $1.67, up 6.34 cents.
"We believe oil markets may have entered the early stages of what we have
referred to as a "super spike" period -- a multi-year trading band of oil
prices high enough to meaningfully reduce energy consumption and recreate a
spare capacity cushion only after which will lower energy prices return,"
said Arjun N. Murti, an analyst with Goldman Sachs and one of the authors of
the report. "Resilient demand has caused us to revise up our super-spike
range to $50-$105 per bbl up from $50-$80 per bbl previously."
Murti pointed out that the new super-spike range conservatively corresponds
to gasoline spending in the United States that reaches 3.6% of the
forecasted Gross Domestic Product, 5.3% of consumer expenditures, and 5% of
personal disposable income. "If we were to assume that gasoline spending
needs to reach the heights of the 1970s, our upside super-spike estimate
would be $135 per bbl for WTI," he said.
Some market experts said the report definitely contributed to the
"background noise" that helped futures contracts such as natural gas higher
(see related story). "Part of the background noise is this asinine
projection by somebody at Goldman Sachs that crude oil could hit $105/bbl,"
said Ed Kennedy of Commercial Brokerage Corp. in Miami. "They better watch
themselves. If there is even a hint of them trying to manipulate market
prices they are in deep trouble. I've been a technician for 35 years... You
cannot predict a super-spike! I have no idea what they are talking about."
Goldman Sachs also raised its base case forecast for Henry Hub spot natural
gas for 2005 and 2006 to $6.73/MMBtu and $7.00/MMBtu, up from $6/MMBtu in
both years, respectively. However, under the super-spike potential, Goldman
Sachs said prices could be as high as: $6.75 in 2005; $9 in 2006; $13 in
2007; $9 in 2008; $6.50 in 2009; and $4.50 in 2010.
"Note, our Henry Hub forecast does not rise as much as our WTI estimate due
to relative weakness in residual fuel oil pricing -- a key alternative fuel
to natural gas," Murti said in the report.
The analyst added that the significant increase in WTI oil prices in recent
years has been primarily driven by fundamental factors and geopolitical
Rising E&P cost structures due to increased geologic maturity in many of the
traditional areas of oil supply as well as service and materials cost
inflation have driven an increase in long-dated WTI oil prices and in turn
spot WTI oil prices.
Growing premium for light-sweet crude oils like WTI relative to heavy-sour
grades is due to high (and rising) OPEC production volumes, limited complex
refining capacity, and increasingly strict sulfur specifications in the
United States and Europe.
Significant increases in energy efficiency since the 1970s have allowed
world economies to more easily withstand what otherwise appear to be high
nominal oil prices.
Geopolitical turmoil in key oil exporting countries coupled with populist
rhetoric in many of these same places that keep foreign oil companies from
developing host country resources in a timely manner has limited supply
growth from areas that could otherwise meet oil demand growth at lower
The analyst added that it is possible that the revised price forecast could
still be conservative. "The strength in oil demand and economic growth,
especially in the United States and China, following a year of $40-50 per
bbl WTI oil has surprised us," Murti said. "Looking back at the late 1970s
and early 1980s, we see that U.S. gasoline spending was a much higher
percentage of the U.S. economy and consumer spending than it is today,
likely explaining the lack of impact we have seen thus far from what
otherwise appear to be high crude oil and gasoline prices. Our new
'super-spike' range assumes a level of gasoline spending relative to the
economy and consumer spending that is still below the heights reached in
1980-1981, suggesting our new range could prove conservative, especially if
there is a supply disruption in a major oil exporting country."
As for the subject of oil supply, Murti said he doesn't believe the spigot
is running dry. "We are not subscribers to the theory that global oil supply
has hit some magical inflection point that will result in permanent supply
declines at some point in the near future," he said. "Though we recognize
that the nature of oil is such that it will be difficult for anyone to
definitively prove or disprove such theories, it appears to us that there
exists a large 'known' quantity of both conventional and unconventional oil
resources to develop."
He pointed out that the real issue is that a large portion of the resources
are effectively off limits to western investment due to either outright
prohibitions or restrictions on investments placed by host governments in
the Middle East, Russia, and Venezuela. "Until the political landscape
changes to allow for significant increases in investment either by the host
countries themselves (through state-owned oil companies) or by foreign oil
entities, we believe the current tight supply/demand environment will
persist until demand destruction materializes," Murti said.
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