Oil futures storm a new record
In global petroleum market news, oil futures stormed a new record near USD 123 a barrel Tuesday, on a forecast of a super-spike and lingering supply shortage concerns. Light, sweet crude for June delivery jumped to a new record of USD 122.73 a barrel before retreating to settle up USD 1.87 at a record USD 121.84 on NYMEX. In London, June Brent crude futures rose USD 2.18 to settle at USD 120.31 a barrel on the ICE Futures exchange. A new Goldman Sachs prediction that oil prices could rise – in a super-spike – to USD 150 to USD 200 within two years largely drove Tuesday's buying frenzy, although a falling dollar and increasing concerns about declining crude production in Mexico and Russia were also contributing factors, we believe. The Energy Department raised its O&G price forecasts, but also predicted that high prices will cut demand more than previously thought. Crude oil prices have nearly doubled from about USD 62 a barrel a year ago, which Goldman sees as a sign that the world is in the midst of a "super- spike" in oil prices. Analyst Arjun Murti said in a research note released Monday that prices would ultimately force demand to fall sharply. Not everyone subscribes to Goldman's view, however. Tim Evans, an analyst at Citigroup USD 40 a barrel as rise to USD 200 over the next two years because supplies are, as Evans put it, comfortable. We would like to not that such a prediction by Goldman is not new, as we have heard numbers like these out of this brokerage, especially over the last 12 months. Indeed, it's not the first time Murti has espoused a super-spike theory. As we noted earlier, in an April 2005 note, this analyst predicted the oil market was in the early stages of an unprecedented rally that would send prices from a then-record of about USD 57 a barrel to USD 105. And despite the fact that Goldman has a major crude oil trading division, which makes such forecasts something like “self-serving prophecies”, it’s noteworthy that Murti’s other “super-spike” predictions have proven to be uncannily accurate. Meanwhile, in a monthly report, the U.S. Energy Department's Energy Information Administration predicted oil prices will average USD 110 a barrel this year, up USD 9 from last month's forecast. The EIA also said high prices will cut U.S. demand for petroleum products by 330,000 bpd this year; last month, the EIA predicted U.S. petroleum consumption would fall by 210,000 bpd. However, strong oil demand from such countries as China, India, Russia, Brazil and in the Middle East will support high prices and keep global oil demand growing by about 1.2 mn bpd this year, unchanged from last month's forecast, the EIA said. A falling dollar on Tuesday also fueled buying. In our opinion, market watchers are also increasingly concerned about falling oil production in Russia and Mexico, which are major oil producers. And red-hot prices are still bolstered by concerns about supply disruptions in Nigeria, where production at a Royal Dutch Shell PLC facility was cut after a weekend attack, and in Iraq, where Kurdish rebels warned they could launch suicide attacks against American interests to punish the U.S. for sharing intelligence with Turkey after Turkey bombed rebel bases in Iraq on Friday. Moving forward, we can see that the bulls are in control of the market and we expect to see WTI and Brent reach the USD 125-130 price range within the next couple of weeks. Given the May holiday hiatus, investors have not yet priced the higher prices into Russian oils, but we believe the sector is due for an upward rerating before long, which means that now is a good time to BUY into Gazprom, Lukoil, Gazprom Neft and Bashkir oil companies at the current price levels.