Goldman Sachs Forecasts High Oil Prices

Brian Hicks

Written By Brian Hicks

Posted August 20, 2013

Oil prices have been going, up, up, and UP lately amid a lot of geopolitical turmoil in some parts of the world.

West Texas Intermediate had six straight days of gains through last week. And now Goldman Sachs Group Inc. (NYSE: GS) has raised its price forecasts for Brent crude.

iraq-oil-productionLibya and its oil disruptions are still ongoing, and from the looks of things, there’s no end in sight. And the problems in Iraq are likely to extend through the fall months.

As a result, Goldman Sachs raised its three- and six-month Brent price forecasts, citing both Libyan and Iraqi disruptions. Its 12-month plan remains the same.

From Bloomberg:

“The disruptions in Libyan oil supplies have lasted far longer than we initially thought, with no near-term resolution in sight, which was further complicated by the involvement of the military,” said Jeffrey Currie, a Goldman analyst in New York. “Combined with the ongoing problems in Iraq, which we see extending into the autumn, OPEC outages since the beginning of the summer have taken 33 million barrels off the market.”

According to analysts in a release on Monday, Brent prices could reach $115 per barrel soon.

Libya’s problems have been ongoing for over a month now. Aside from violence, crude oil production is down, and labor disputes that bring strikes to its fields and ports aren’t being resolved. This OPEC member holds Africa’s largest reserves and hasn’t seen its exports this low since its civil war in 2011.

Iraq has a different set of issues. The nation faces maintenance and infrastructure problems that are preventing it from maximizing efficiency.

And maybe you’re wondering how Egypt’s latest melee will affect the market. The Middle East accounted for 35 percent of global oil output in the first quarter of this year, and Egyptian Defense Minister Abdelfatah al-Seesi proclaims that the violence that left hundreds dead last week will not bring any additional aggravation to its production. We’ll have to see about that.

On Monday, futures did fall to 0.7 percent in New York as concerns mounted for Middle East shipments. Global inventories tightened, and refinery rates in the U.S. fell for a fourth weekly drop to the week ending August 9, Bloomberg reports.

Goldman’s Near-Term Forecast

But Brent prices are still largely supported by supply disruptions and the geopolitical nature of markets outside of the U.S.

In Goldman’s note on Monday, the 3- and 6-month Brent price forecasts were set at $110 and $108, respectively, both up from $105. The 12-month outlook will still remain at $105, Business Insider reports.

As expectations for a stronger growth in global production come in the next two years, a balance of inventories and a steady Brent forecast should be realized by mid-2014.

Brent is the benchmark for over half of the world’s oil, which means the price could reach $115 in the very near future if Goldman Sachs analysts are correct. It’s currently hovering right around $110 per barrel.

Brent and WTI

While we know that Brent is the primary indicator for the price of oil around the world, West Texas Intermediate (WTI) hasn’t lagged far behind, even briefly overtaking Brent in price for a short while.

Brent reflects many different markets and types of crude, but if we want a clear indication of where the U.S. is headed, we must look at WTI.

In July, WTI jumped 8.8 percent as unrest swirled in other parts of the world. But the advance may start stalling out. WTI for September delivery, which ends today, dropped 71 cents yesterday.

So as we look for our approach, we have to remember that the Egypt is still unsettled right now, and Libyans can’t seem to meet eye to eye. For WTI, the Gulf storm was the reason things closed off on the topside going into last weekend, but that’s sure to change.

Global supplies should remain tight, but not so tight that we should assume outages will persist – there are plenty of sources out there to keep prices from getting too out of hand.

These past couple weeks have been a tumultuous time, and as Goldman Sachs says, we could see Brent at $115 before we know it.


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