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THE WALL STREET JOURNAL: Crude Awakening: Analysts Adjust: ‘prices could rocket as high as $200 a barrel’

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THE WALL STREET JOURNAL: Crude Awakening: Analysts Adjust

Predictions Revised
As Prices Stay High;
A Call for $200 Oil
March 10, 2008; Page C2

A two-week string of record oil prices has left prognosticators at banks and brokerage firms struggling to keep pace.

With crude futures trading firmly above $100 a barrel, oil economists are revising their forecasts — up.

Oil has traded at an average price of $95.12 a barrel this year on the New York Mercantile Exchange, up 65.5% from the start of last year. That has left many analysts’ forecasts in the dust. Lehman Brothers, for example, recently boosted its first-quarter forecast for benchmark Nymex crude to $93 a barrel, up $7 from its earlier outlook. The bank sees oil averaging $86 this year, but acknowledges the pitfalls it’s facing.

“We still expect a correction in the prices of several commodities, notably crude oil, but investors’ recent focus on longer-term bullish structural factors, many of which we agree with, make it difficult to call for anything other than a pause in oil’s rise,” Edward Morse, Lehman’s chief energy economist, said in a letter to clients on Thursday.

A team of Goldman Sachs equity analysts, who three years ago made waves by predicting a price “super spike” to as high as a then-unheard of $105, weighed in again last week. They suggested prices could rocket as high as $200 a barrel if the U.S. economy regains momentum or a wrench is thrown in the world’s oil supply.

Oil and other commodities have bolted to records as investment funds seek out hard assets as a hedge against a falling dollar. That has led analysts and consumers to warn of a bubble, and has made forecasting an even more treacherous business than usual.

“To say that the last $15 of the oil rally has taken most of us analysts by surprise could be called an understatement,” said Antoine Halff, deputy head of research at Newedge USA in New York. “The problem is that in this market, one can forecast the fundamentals right but get the price wrong.”

Concerns about speculation have seeped into the mechanics of supply and demand as well. Last week, the Organization of Petroleum Exporting Countries, which meets about 40% of the world’s crude demand, chose to keep output steady despite record prices. The cartel says there isn’t demand for extra oil and laid blame for soaring oil prices at the door of what Saudi Arabia’s oil minister, Ali Naimi, called “tremendous speculation.”

Analysts say there are plenty of actual tensions to underpin prices. Michael Wittner, global head of oil research at Société Générale in London, acknowledges the impact of financial flows on commodities. But he says strength in futures prices for delivery dates years into the future demonstrates that real concerns about supply and demand underpin today’s market frenzy.

Contracts for delivery four years from now, for example, settled at about $97 a barrel on Friday. “The long-term argument is strong Asian-led demand growth meets maturing supply,” he said.

Mr. Wittner’s last forecast, made in December, saw crude prices averaging $81 a barrel this year. “I am in the process of revising the forecast,” he said. “I’m not revising it down.”

Yet the surge in prices isn’t as endless or as inevitable as it’s looked lately, brokers and analysts say. Should the dollar find its backbone — even briefly — oil could come crashing back down, said Michael Korn, president of Skokie Energy, a Princeton, N.J.-based brokerage firm.

The effect of high prices on the economy also has the potential to eventually counter the impact of the dollar, a long-predicted threat that has so far yet to materialize. Mark Waggoner, president of Excel Futures in Huntington Beach, Calif., sees crude falling about $10, to $94 a barrel. But that will be a short-lived correction, as oil heads toward $120 by June, he said.

After that, enough negative economic data will have accumulated to finally put the brakes on the rally. “I don’t think it gets much past that,” he said. “It will pull back.”

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