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Oil predicted to reach $200

 
7 May 2008

A new Goldman Sachs report released Tuesday (May 6) forecasts oil to reach between $150 and $200 within two years…. … This prompted oil futures to clear $123 per barrel just a couple days after dipping to $111.

Supply shortage concerns also ran through the market as speculators flying high on the forecast reacted to any news during the New York trade.

Surprisingly, average retail gas prices dipped slightly to $3.61 per gallon. This small dip is not expected to last long however, as analysts are now calling for $4.00 per gallon in a matter of weeks, assuming the current oil trend remains steady. This seems likely given that any oil price dip at all in recent weeks has been met with a rapid buy response.

While speculators responded to the Goldman Sachs announcements, other analysts reacted to the forecast with more conservative attitudes. Sachs believes oil is in the midst of what is known as a “super spike”, a period of a rapid price climb in a short timeframe. A Citigroup analyst put out a note suggesting that oil is at least as likely to revert back to the $40 per barrel price range in a year as it is to climb to $200.

The Energy Information Administration also shared its forecasts, which were also less aggressive than the Sachs report. The EIA said oil prices will average $110 per barrel over the course of 2008. This is a $9 per barrel increase over the Administration’s forecast from last month. However, it suggests that oil will not rise as much as others seem to think over the coming months.

The EIA also seems to believe gas prices will rise less drastically than others. The groups predicted a $3.73 per gallon average for the month of June. This is 13 cents more than it had forecasted last month, but it also predicts a more modest upward trend over the next several weeks.

Part of the reason some analysts are more conservative about stronger spikes in oil and gas is the expectation that reason prices are leading to less demand. Often, oil and gas demand is not as price sensitive as demand for other products, but many companies are working to lower their use of, and demand for, oil and natural gas. It seems as though prices have reached a level where companies and individuals are starting to find alternative means of energy and transportation.

The dollar has started off the new week a bit sluggish after finishing last week with a powerful flurry. As is normally the case, the dollar was weak today in light of rising oil prices. Those analysts that forecast strong increases in oil are likely factoring in more drops for the dollar during the same timeframe. The dollar generally weakens inversely to rising oil prices because of the US reliance on foreign oil. Weaker dollars buy less oil, so it takes more dollars to buy oil when the currency is weak. Additionally, a weak dollar is not as appealing to foreign suppliers.

The thought of rising gas prices is hard enough for Americans to ponder, but Fannie Mae fanned the negativity of the day’s news by predicting more losses are in store for housing prices. As consumers look to tax rebates to help stem increased gas and consumer goods prices, the thought of more depreciation in property values was less than exhilarating for Americans. Investors showed their resilience, however, as all three major stock indexes were up on the day, in spite of the negative housing news and the rising oil prices.

Market Recap

Stocks were down on Monday with the big event of the day being Microsoft’s withdrawal of its bid to purchase Yahoo. The Dow was down 88 points, while the NASDAQ and S&P dropped 12 and 6 points. Oil climbed back over $120 per barrel as supply questions emerged. Stocks were up modestly Tuesday, in spite of a new Goldman Sachs forecast of $150-200 oil within two years. Oil climbed over $123 on the report. The Dow was up 51 points, while the NASDAQ and S&P were up 19 and 10 points, respectively. Cisco beat its modest profit expectation. Fannie Mae reported losses and expects more housing price declines.

Neil Kokemuller
Tuesday, May 6, 2008
10:19 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.

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