By Jason Simpkins
Oil soared to yet another record high on Friday after Goldman Sachs Group Inc. (GS) raised its price forecast for the second half of the year. However, during a visit with Saudi Arabia's King Abdullah U.S. President George W. Bush was able to convince the world's leading oil exporter to increase its output.
Light sweet crude for June delivery jumped $3.31 a barrel, or 2.7%, to reach $127.43 in electronic trading on the New York Mercantile Exchange. Oil prices have now soared 103% in the past 12 months.
The jump was largely attributable to a new prediction from investment-banking giant Goldman Sachs, which raised its price forecast for the second half of the year to $141 a barrel. Goldman Sachs analysts had previously quoted a price of $107 a barrel.
"Supply constraints continue to push crude prices higher," Goldman analysts wrote in a research note Friday. "The dire macroeconomic impact from the current oil shock has yet to materialize."
This is the second time in as many weeks that a Goldman Sachs oil-price prediction has ignited a trading tempest in the crude-oil markets. Goldman Sachs, JP Morgan Chase & Co. (JPM) and CIBC World Markets Inc. each recently put forth scenarios that have oil surging over $200 a barrel in the next two years, as soaring gas prices and wary U.S. consumers have failed to put a significant dent in oil demand.
In their report, CIBC analysts actually predicted that gasoline would reach $7 a gallon within four years as oil prices surged to $200 a barrel.
However, Money Morning Investment Director Keith Fitz-Gerald – a longtime energy bull – has actually gone a step further suggesting prices will spike as high as $225 a barrel.
That projection represents a revision from a market call he made in December, when crude prices were in the $90-a-barrel range: At that time, Fitz-Gerald caused a stir when he predicted that oil prices were headed for $187 a barrel. He reiterated that prediction back in early March – just before the investment-banking crowd started making their hefty forecasts for oil and gasoline.
"The math is really simple here," Fitz-Gerald said in an e-mail interview from China, where he was heading an investment-research tour. "We are burning through supplies at a rate that's four times to five times faster than we're discovering new reserves. Throw in a few [surprises] … perhaps a terrorist event …and add in the accelerating use of oil and gasoline in Third World countries, and we have the recipe for far higher prices. That's already in the oven."
In addition to the proprietary strategy he uses to project market prices, Fitz-Gerald said he relied on some of the observations he's been making as part of the investor trip he's leading through China.
After all, with all the bustle and development taking place in that country, all it takes is for one to stroll down the street to see that the demand for oil and gasoline is going to increase far faster than most analysts would ever believe.
"Nowhere is that more evident than China where I'm traveling now," Fitz-Gerald said last week in an e-mail from Mainland China's capital. "Beijing alone is adding 14,000 vehicles a day (1,500 of which are just cars). Across China, the number is obviously higher. [The] same [is true] in India, but I don't have the figures at my fingertips. Then there's the other side … evidence suggests that OPEC reserve figures may be artificially high. Imagine what's going to happen when people figure out that there really isn't as much oil as everybody thinks. $225.21 is not out of the question … after we get to $187."
Famed investor Jim Rogers shares Fitz-Gerald's belief that the Organization of Petroleum Exporting Countries (OPEC) may be guilty of some subterfuge in reporting its reserves.
"Saudi Arabia has announced for 20 years in a row that they have 260 billion barrels of oil in reserve," Rogers recently told Money Morning during an exclusive interview in Singapore, where he now makes his home. "It's astonishing. The figure never goes up and it never goes down. They have produced dozens of millions – billions – of dollars of oil in that period of time.
"If you go to Saudi Arabia you have to wonder: ‘How could this be? How could it be that every year for 20 years in a row, you always have 260 billion barrels of oil in reserve?' The Saudis say: ‘You either believe us or you don't."And that's the end of the conversation."
Saudi Arabia Changes Its Tune
OPEC nations have routinely resisted calls to increase output, insisting that investor speculation has hijacked the market and high oil prices have nothing to do with demand, which they see declining as the U.S. economy continues to slow. OPEC, which pumps more than 40% of the world's oil, has kept output targets unchanged during its past three meetings, on March 5, Feb. 1, and Dec. 5.
In fact, in its Monthly Oil Market Report for May, the cartel said global demand for oil would grow at a significantly slower rate than previously forecast. World oil demand will rise by 1.16 million barrels per day (bpd) – 40,000 barrels per day less than previously predicted.
However, OPEC analysts also acknowledged that non-member nations would produce less oil than originally thought, and after President Bush met with King Abdullah Friday, there was a sudden reversal of fortune.
Late Friday, Saudi Oil Minister Ali al- Naimi said the country would raise output by 300,000 barrels a day to 9.45 million barrels a day in June, Bloomberg Newsreported.
"On May 10 we increased our response to our customers by 300,000 barrels because they asked for it," al-Naimi said. "So our production for June will be 9.45 million barrels per day. This is the request of about 50 customers worldwide."
In its monthly report, OPEC said its production fell by about 390,000 barrels a day in April, mostly due to violence in Nigeria. The same report said Saudi Arabia's April production was 9.02 million barrels a day, down 37,000 barrels a day from a month earlier.
The increase comes as gas prices climbed to historic highs, drawing the ire of many U.S. politicians. It so happens that Saudi Arabia has a number of deals on the docket with the United States that risk interference should high oil prices persist.
Last week, Senate Democrats introduced legislation to stop a scheduled arms sale to Saudi Arabia unless the country opened its valves a little wider.
"When the President meets with King Abdullah Friday, we cannot settle for a smile, or a handshake, or even a glimpse into his soul," Senator Charles Schumer of New York said. "We need a commitment to pump more oil. If Saudi Arabia and other OPEC countries do not substantially increase production, we in Congress will block their lucrative arms deals."
"The United States and Saudi Arabia have agreed to cooperate in safeguarding the kingdom's energy resources by protecting key infrastructure, enhancing Saudi border security, and meeting Saudi Arabia's expanding energy needs in an environmentally responsible manner," a White House statement said.
According to Reuters, the United States and Saudi Arabia will sign a memorandum of understanding to cooperate on a peaceful nuclear program.
"This agreement will pave the way for Saudi Arabia's access to safe, reliable fuel sources for energy reactors and demonstrate Saudi leadership as a positive non-proliferation model for the region," the White House statement said.
News and Related Story Links:
- Wall Street Journal:
Saudis to Bush: So Sorry, But That Uranium Looks Tempting
- Money Morning:
As Oil Prices Hit Another Record High, Consider These Three Ways to Profit From This Long-Term Gusher.
Goldman Sachs and the oil bulls; Commentary: Feeding frenzy as analyst predicts $200 a barrel oil.
- Money Morning:
Money Morning Boosts Oil Target Price to $225 a Barrel, Thanks to Continued Scarcity, Burgeoning Demand in China.
State Grid Corp. of China.
- International Herald Tribune:
U.S. Congress votes to stop stockpiling oil