Goldman Sachs Cuts Oil Price Prediction

Goldman Sachs is generally pretty bullish on crude oil price targets.  As recently as 3 September they were predicting oil will reach $149/barrel by the end of 2008.  Now the news wires report that Goldman Sachs has cut its average 2009 US crude oil forecast by $25 to $123/barrel.  From Upstream Online,

“We stand by our bullish view on oil, but just think it will now take longer to get to our previous price targets,” Reuters quoted the bank’s commodity research team saying in a note to clients.

“…The overshoot in June and July increased the forward price elasticity of demand (making demand more price sensitive) and restrained economic activity,” the note, released yesterday, said.

Goldman also cut its three-month forecast to $115 a barrel from $149, and its six-month target to $125 a barrel from $142.

The continuing meltdown in the financial markets has left investors moving from oil to safer investments.

“The market has overshot to the downside and is now substantially oversold as … financial concerns, scepticism, and real and perceived demand weakness (have) pushed prices below the long-term economics of the petroleum industry,” Goldman added.

While maintaining a bullish stance for oil, Goldman’s analysts led by Jeffrey Currie said prices could drop to $75 a barrel in the event of a global recession, which Goldman said it viewed as relatively unlikely.

“However, given the tight inventory situation and high price volatility, should shortages develop this autumn … we believe that the market could spike $10 to $15 a barrel higher than our targets,” it also said.

Price spikes of that magnitude (8% – 12%) are well outside of historical norms, and would indicate that crude oil prices are now acting in a non-Gaussian manner.  We may be reaching a break point where crude oil prices start swinging wildly without a smooth baseline average.  This would be similar to the crude oil prices in the late 1800s when crude oil went through several boom and bust cycles.

Goldman’s previous $148 forecast for 2009 was the highest in a Reuters poll of more than 30 analysts late last month. The new target of $123 still puts it above that poll’s mean of $113.21 a barrel, but in line with long-term fellow bull Barclays.

The cut comes just days after the bank’s energy equity analyst Arjun Murti left his forecast for oil prices unchanged but added at the time prices could fall below $100 a barrel in the event of a global recession.

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