Energy Watch: As the financial crisis eases, an energy shortage lies ahead
Goldman Sachs Global Economics, Commodities and Strategy Research June 3, 2009
Commodities Energy Watch
As the financial crisis eases, an energy shortage lies ahead With a credit dislocation in timespreads reversed and the risk of breaching storage capacity reduced, we are raising our oil price forecasts. Because the recent rally was driven mostly by credit normalization, the market has not yet priced in an economic recovery.
The credit normalization rally before the economic recovery rally WTI prices rallied to our end-of-year target of $65/bbl by the end of May, as timespreads strengthened in the face of rising inventories. In our view, this unusual behavior, suggests that the rally was driven by the unwinding of pricing dislocations caused by the credit crisis and the avoidance of breaching storage capacity.
Because this rally has been largely a reversal of pricing dislocations, we view it as the prologue to the rally in WTI prices that we continue to expect will accompany the economic recovery. With the risk of further pricing dislocations reduced, we are omitting the prior anticipated price pullback from our forecasts and have raised our 3-month ahead price target to $75/bbl from $52/bbl.
From financial crisis back to energy shortages The recent rally in WTI prices is likely to be but the first stage in the oil price rally that we expect will accompany a recovery in economic activity. In all, we expect the rally we have just observed to be followed by three more stages, creating a four-stage rally in oil prices in 2009 and 2010:
2009H2: A cyclical bull market as the economy stabilizes and OPEC maintains cuts to draw inventories to 10-year average levels. We are raising our end of 2009 WTI price forecast to $85/bbl from $65/bbl.
2010H1: A structural bull market as long-dated prices rise to motivate renewed Non-OPEC production capacity investment while OPEC spare capacity returns to the market in an attempt to bridge the gap. We are raising our 12-month WTI price target to $90/bbl from $70/bbl.
2010H2: A likely return to energy shortages as dwindling OPEC spare capacity is likely unable to meet rising demand as Non-OPEC production growth is restricted by limited investment in oil production infrastructure. We are introducing an end 2010 WTI price forecast of $95/bbl.