Goldman Sachs: Oil’s going to $85 by year end

Oil hit $67 a barrel yesterday, driven the perception the global economy may have hit bottom, among other factors:

Much of oil’s rally this year has tracked stock market gains as investors look to equity markets for signs of economic recovery, while a weaker dollar can boost the appeal of oil and other commodities as a hedge against inflation.

“Equity markets are performing well, the dollar is falling, add to that Goldman Sachs and you see why oil has risen,” said Simon Wardell, oil analyst at Global Insight.

Goldman Sachs raised its end of 2009 oil price forecast to $85 a barrel from $65 and introduced a new end of 2010 forecast of $95.

“The recent rally in WTI (U.S. crude) prices is likely to be but the first stage in the oil price rally that we expect will accompany a recovery in economic activity,” Goldman said in a research note.

If oil hits $85 this year, then no doubt it will exceed $100 a barrel some time before my June 2009 prediction (even if it ends 2010 at $95, which I doubt).  And that means some lucky reader is going to win the CP contest “When will oil hit $100 a barrel?”  Just goes to show you, you can’t be sufficiently pessimistic these days about peak oil!

Indeed, as the Miami Herald reported Tuesday, leading forecasters are warning that “low oil prices now may mean higher oil prices later“:

Energy investment worldwide is plunging in the face of a tougher financing environment, weakening final demand for energy and falling cash flows,” the Paris-based International Energy Agency warned in a report late last month.

The IEA also warned that investment is being curtailed both on the supply side and the demand side, meaning that spending is falling on both drilling of oil and gas wells and on expansion of refineries, pipelines and power stations….

One of the world’s leading voices on energy trends, IHS Cambridge Energy Research Associates, reached a similar conclusion in a private report titled “The Long Aftershock.”

CERA researchers believe that deferred or canceled projects will prevent 7.6 million barrels a day of expected oil growth from coming onto world markets in 2014.

“CERA estimates that 52 percent of the potential net growth in liquids production capacity from 2009 to 2014 is at risk of deferment or cancellation because of poor project economics or investor cash flow difficulties,” CERA’s report said.

The energy research group thinks that the projected additional new oil production capacity of 14.5 million barrels a day coming online through 2014 will be cut in half unless there’s a sudden spurt in demand. This reduced production could spark supply shortages and price spikes.

This is very similar to an analysis that Merrill Lynch did in February (see “Merrill: Non-OPEC production has likely peaked, oil output could fall by 30 million bpd by 2015“), which found, “Steep falls in oil production means the world now needed to replace an amount of oil output equivalent to Saudi Arabia’s production every two years, Merrill Lynch said in a research report.”

In a few weeks I am going to a small conference with some of the leading experts on peak oil, including Kuntsler and Matt Simmons, so I’m sure I will have a more dire news to report in July.

Fortunately, we do have a president who gets this, so the country will be partly prepared for the coming shock (see “Has Obama saved Detroit from itself “” or is that simply impossible?“)

10 Responses to Goldman Sachs: Oil’s going to $85 by year end

  1. Sten Haastrup says:

    I really hope you mean June 2010 for the date oil will hit $100 dollars a barrel because otherwise we might be in for an interesting show in the coming weeks :-)


  2. Rockfish says:

    I thought the Opec guys were being a bit conservative last week when they predicted $75 by the end of the year. Looks like end of the MONTH is more like it, and at this rate it could be tomorrow.
    After all, we were at $30 in what, December? So up $40 in 6 months, output flat or declining, demand flat and increasing, says to me we could be up another $40 by year end without any problem at all. Odds are we’ll see the airline bailouts start to happen at that point.
    Hang on folks, it’s going to be a bumpy ride.

  3. Brandon says:

    Oil going up higher? YEAH!!!

    I’m happy since my oil stocks and ETFs are going up. You can join in the fun too by buying shares of OIH, USO, XOM, CVX, BP, and similar stocks. It’s not too late; oil is undervalued now.

  4. Trebor says:

    “so I’m sure I will have a more dire news to report in July.”

    I am not sure I understand your position. Surely we should be rooting for lower production and higher prices? From a climate change perspective the worst possible news would be (say) the discovery of another trillion barrels under the Arctic or somewhere. The sad truth is that the world is unlikely to get serious about clean energy until the dirty sort gets too expensive.

    The sort of discussion going on in the Peak Oil community at the moment is about the interplay between PO and global recession. A popular idea is that the world will oscillate between high and low oil prices as the world goes in and out of recession on an ongoing basis – at least while we are on the PO plateau. Once we hit the downslope then I guess we are heading for a permanent recession.

    The sensible strategy would be to anticipate this and get on with the huge task of getting off oil (and indeed all fossil fuels) – not hoping against hope that we will find more and thus slightly delay the inevitable.

  5. Lou Grinzo says:

    First, what we want is low production due to low demand, and therefore low prices. I.e. we leave oil before it leaves us. Probably the best we can hope for is to blunt the impact of the post-peak decline enough to avoid the worst of the economic and therefore human cost.

    Second, do not, I repeat, DO NOT, listen the peak oil community (and I’m one of them) about economic issues, unless you know for a fact that the person is sane and well versed in such things or is one of the rare economists who goes online where he or she isn’t welcome (I’m one of those, too, and I’ve been verbally abused dozens of times just because of my college major) or you’ll hear absurd things like talk of a permanent recession.

    Third, what I just said also applies to the oscillating recession while on the plateau nonsense. That’s claiming a level of predictive skills that no one on this planet has. This one could indeed happen, but don’t confuse the blind pig stumbling upon an acorn with it “knowing” where said acorn was all along.

    Finally, you’re 100% right about the value of accelerating our transition away from fossil fuels. It can’t happen soon enough.

  6. Neil Howes says:

    I don’t know how it is possible to have any more dire news that Kuntsler’s predictions that we will never transition form ICE vehicles to electric and instead abandon most of our suburban homes( to where I am not sure).

    It seems that climate change news is always going to be more serious than any peak oil news, we can have gasoline rationing and survive with an inconvenience while we wait for Federal GM to make the vehicles the world needs, but putting the CO2 back in the bottle will be a little more difficult.

  7. hapa says:

    hm. running through my reactions to this, i find myself sympathizing with people facing very serious household/organizational finance shortfalls when energy prices climb, a vulnerability which has ratcheted up again, right — they were already in the red in 2007, with little trickling down to them, and are now facing bankruptcy and homelessness, so the level of fuel prices that they experience as “painful” is probably a little lower now than it was two years ago.

    i think i have come to be very distrustful of my fellow americans — between the overreaction to terrorism and underreaction to ecological problems — it looks like as the finance people have gone insane, the general population has become faint-hearted, facing change primarily with fear of loss, possibly because of mounting bills and hours worked.

    i think people aren’t like that, i think people can be trusted a little better than i do. my main problem seems to be too much intermediation via conservative and corrupt leadership — which happens because there’s a divide — ordinary folk don’t think in big enough scale, driving me to interact with and read stuff by people who are better informed but have conflicts of interest.

    ok so oil. lou grinzo’s stuff is good. (btw lou i don’t think you were fair to mike moore about gas taxes. even if he doesn’t know they can be neutralized, he’s certainly not someone who would fight to stick it to the little guy if confronted with household finance realities, and there’s no doubt a $2 tax, or $4 floor price, would stimulate demand for greener transport.)

    i’m more worried about the volatility and this endless talk of “green shoots.” they’re incompatible. the existing system of finance and deployment is based on long periods of stable prices, allowing rigid finance arrangements to take the place of more fluid investment practices.

    the “green shoots” stuff is about delaying the switch to more resilient planning and finance tools, away from the “great moderation” powers-that-be, who seem to want every investment to have a guaranteed high return, with handsome fees, instead of gaining from a more careful portfolio.

    but i don’t think we can build what we need to build and change what we need to change while the bankers and bureaucrats are hell-bent on turning us back into credit addicts by exploiting ever exposed inch of stable demand (such as for oil). these temporary choices add up to permanent infrastructure. we shouldn’t be making our choices based on the ability of the investment to fellate overextended brokers, on a roller coaster.

  8. Trebor says:

    Lou, This utube video illustrates the concept in quite an appealling way. It is based on classical economic principles, making the assumption that the demand curve is highly inflexible in the short term:

    Interestingly it was posted in May 2007, well before TSHTF.

  9. zed ink says:

    Mebbe you guys should be considering the bill of goods such goldman Sachs pronouncements are..

    “peak oil” is nowadays their prompt to push prices. Not, as you might suppose because their is an actual shortage of oil, but because its use retains a usable market perception builder.

    In reality there is plenty of oil. The shortage being in so-called sweet light crudes(relatively cheap to fractionate and thus used first). However, heavy oils are bountiful.

    Do get this—lower quality higher priced—so suckering consumers of finished product like gasoline, diesel which you can bet cannot now be refined to same standards as formerly etc

    The other problem in market pricing is the deliberate exclusion of energy products from the Futures Modernization Act of 2000. Thus enabling hedge funds to muscle into pricing structures..

    Points to keep in mind I hope you’ll agree as the primary price beneficiaries seek to elevate their markets..

    And not to overlook the likely facts of lower grade products having a greater deleterious effect upon your environment

  10. zed ink (rippo) says:

    sorry, didna have time make the following addition to my earlier comment..

    Vancouver (Platts) –05 Jun 2009 — [Oil] Canadian oil sands production could grow by 175% to 3.3 million b/d in 2025, despite across-the-board cancellations or postponements of projects since last fall, the Canadian Association of Petroleum Producers (explained)

    Point being to alert folks to the dirtiest of ‘heavy oil’ extractions.. very cheap resource, very very profitable for hedge funds. Lose-lose.!!