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Sat 17 May 2008 01:22 PM

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Goldman hikes oil price forecast 30%

Investment bank says prices will average $141 in H2, up from $107, due to tight supply conditions.

Goldman Sachs, the most active investment bank in energy markets, on Friday sharply raised its forecast for oil prices in the second half of this year, citing tight supply.

The bank expects US crude to average $141 a barrel in the second half of 2008, up from a previous projection of $107, it said. Goldman also forecasts prices will rise further next year to average $148.

"Tight supply conditions continue to be the primary catalyst for higher crude prices," the bank said in a research note. "The near-term outlook for oil prices continues to be bullish."

The Goldman forecast helped send crude prices to a record high of $127.82 on Friday, analysts said. The 2009 estimate is the most bullish among more than 30 banks regularly polled by newswire Reuters.

Goldman, one of the first to point to triple-digit oil more than two years ago - a once unthinkable level - earlier this month said oil could shoot up to $200 within the next two years.

Its note on Friday said that despite the advent of alternative sources such as biofuels, oil supply growth has slowed to 1% from about 1.8% in 2005 and less than the bank's forecast for 2008 world gross domestic product (GDP) growth of 3.8%.

"Given this imbalance, long-term oil prices will need to continue to rise," Goldman said.

Goldman's view that prices are rising in response to tight supply contrasts with others in the industry that oil's rally is being driven by factors beyond supply and demand fundamentals.

Opec, source of two in every five barrels of oil, has rebuffed calls from the US and other industrialised countries for more oil, saying supply is sufficient.

In Opec's view, factors like the weakness of the US dollar, speculative trading, a lack of capacity at oil refineries and political tension are lifting prices, not a lack of oil.

Royal Dutch Shell, the world's second-largest fully publicly traded oil company by market value, has also said current prices contain an element of speculation.

Goldman is the latest bank to raise its price outlook this week.

UBS lifted its projection on Thursday and said inflation risks from rising oil costs would put a global economic recovery in 2009-2010 at risk.

In a note, the bank said oil economist Jan Stuart had lifted the UBS oil price forecast for US crude to $115 a barrel from $86.96, a 32% rise. (Reuters)

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