Developments this week
In a holiday-shortened trading week, oil prices in NY and London climbed smartly on Tuesday and Thursday, with NY crude closing at $98.67 and London at $118.59, up by $7 so far this week. Behind the move was better economic news out of the EU, a continued decline of US crude and gasoline stocks, and an improved US jobs picture. Oil prices are now approaching the June highs, but are still about $15 a barrel below the high reached in early May before the $20 a barrel sell-off.
Gasoline futures in NY rose sharply on Thursday. After trading below $2.70 a gallon last week, gasoline futures have now climbed by 42 cents a gallon in the last 8 trading sessions and are only 18 cents below the high touched in early May. Retail prices climbed last week for the first time in 8 weeks and further increases can be expected after yesterday’s jump.
Major investment banks and brokerage houses are beginning to sound a warning that higher oil prices are in the offing. Although this comes as no surprise to those following IEA statements and the analysis of many in the peak oil community, the markets seem to respond better to Wall Street pronouncements. The Goldman-Sachs’ warning that oil supplies will become “critically tight” in 2012 because the Saudis won’t be able to pump as much oil as most think was particularly strident. Goldman’s went on to say that “it is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand.” As the Wall Street Journal said “If the market becomes convinced of the Goldman view, prices could rise sharply.”
Working from the 2008 peak of Saudi oil production of 9.5 million b/d, Goldman-Sachs concludes that the Kingdom’s top production is around 10.5 to 11 million b/d as opposed to the 12 million b/d estimated by the IEA and the 12.5 million claimed by Saudi officials. Many observers note that the Saudis have spent heavily in the last few years to increase their ability to produce more oil.
Goldman is now forecasting that NY crude will be $115 a barrel in six months and $126 in the summer of 2012. Brent crude is to reach $120 by the end of the year and $130 next summer. Morgan Stanley joined Goldman Sachs in predicting higher prices. In London, Guild Investment Management is expecting Brent to reach $150 a barrel later this year as troubles along the borders of Saudi Arabia continue.
Elsewhere, it has been extremely hot in southern China, adding to the demand for air conditioning. Tehran announced that work on extending the gas pipeline to Pakistan will be resumed in six months. The new gas pipeline is expected to be finished by 2014 and in theory could supply about a third of Pakistan’s shortfall in natural gas.
