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Oil could hit $200 in ‘super-spike’

Oil could hit $200 in ‘super-spike’ 

By Ambrose Evans-Pritchard

Last Updated: 2:47am BST 07/05/2008

Oil prices threaten to hit $200 a barrel in a final “super-spike” over coming months as producers fail to keep pace with blistering demand from China and the Middle East, according to a controversial report by Goldman Sachs.

  An oil rig extracting petroleum in California: Oil could hit $200 in 'super-spike'
US crude prices rose to a new high of $122.35 a barrel yesterday

“We believe the current energy crisis may be coming to a head. A ‘super-spike’ end game may be in the early stages of playing out,” said Arjun Murti, the bank’s energy strategist. 

Goldman Sachs said a chronic lack of supply would lead to a “dramatic and continuous rise in oil prices”, followed at some point by a sharp fall in oil demand as consumers retrench.

US crude prices hit a fresh high of $122.35 a barrel yesterday as rebel attacks on Shell installations in Nigeria and tensions in northern Iraq continued to strain markets already caught in a crunch.

Prices have doubled over the last year in what amounts to a massive transfer of wealth from the Atlantic region to the rising commodity powers.

This week’s jump in prices comes despite the partial recovery of the dollar against the euro, suggesting that alleged investor appetite for oil as a sort of “anti-dollar” is no longer driving the market – if it ever was.

Prices have now surged by more than $50 a barrel since the credit crisis began.

The market has shrugged off the effects of a housing slump in the United States, Canada, Britain and Spain.

The oil boom has revealed just how much the world has changed from the days when the OECD club of rich countries invariably dictated the oil price.

Petrol prices in China and most Mid-East countries are held down by state controls, insulating demand from the effect of the global downturn. Between them, they account for the lion’s share of extra oil use over the last two years. OECD consumption has been flat since 2004.

Goldman Sachs said the spare capacity of the OPEC cartel is already near “minimal” levels. There is a risk that Saudi Arabia will fail to meet output targets, suffering the same sorts of setbacks that have plagued Western oil companies.

  • More on oil
  • Read more by Ambrose Evans Pritchard
  • Non-OPEC producers have lurched from one disappointment to another. Russia’s output fell 150,000 barrels per day in April compared to a year earlier, confirming warnings from industry leaders that Russia’s oil infrastructure is woefully deficient.

    “The possibility of $150-$200 per barrel seems increasingly likely over the next six to 24 months. A gradual rally in prices is likely to be longer-lasting than a sharp sudden spike,” said Goldman Sachs.

    The bank recommended buying Chevron, ConocoPhillips (Conviction buy), the oil service group Halliburton and explorers such as Apache and Cabot Oil.

    Not all analysts believe oil prices can defy the global economic slowdown for much longer.

    Citigroup said prices may fall to $40 a barrel within two years as the cycle turns in time-honoured fashion and fresh supply emerges.

    Lehman Brothers said this week that crude prices had surged far ahead of rise in the underlying cost structure of the industry – typically a warning sign at the end of a cycle.

    The drilling cost for oil and gas wells has actually fallen slightly over the last two years, and even deepwater rig rates have been flat after jumping five-fold since 2004. Some 65 deepwater rigs are coming on stream over the next two years, compared to 10 from 2002 to 2007.

      Brent crude $ per barrel

    “We believe the energy sector is about to see the explosion in the availability of rigs to explore and develop petroleum in deep waters,” said Lehman Brothers, citing fields in the Atlantic Basin, the Gulf of Mexico, the northwest shelves off Alaska and Norway and new discoveries off the coast of Brazil.

    Data on futures contracts from America’s CFTC show that speculative “short” positions on oil jumped 11pc last week, suggesting that at least some hedge funds suspect the boom is overdone and ripe for a fall.

    The picture is contradictory, however. Futures prices as far out as December 2016 have been rocketing to fresh highs, in some cases vaulting at an even faster rate than spot prices. This is unprecedented.

    “We think these moves are very important as they signify the extent to which medium and long-term perceptions are anchoring values,” said Barclays Capital.

    The bank said Gordon Brown and President George Bush were whistling in the wind by blaming OPEC for the latest price surge. The cartel no longer has the capacity to crank up production even if it wanted to do so, said the bank.

    The bloc’s president, Chakib Khelil, said last month that there was very little that producers could do to stop oil reaching $200, if that is where the market wants to go.

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