Forecasts for Crude Oil Rise to $105 on New Trading High
Tuesday, March 4, 2008
Just three years ago, Goldman Sachs shocked the investing world by sharply raising its oil price forecast for 2005 to an average of $50 a barrel. Two months ago, the investment bank predicted that oil prices would average $95 a barrel in 2008.
Yesterday, even that price was already starting to look a little conservative.
The price of crude oil set another inflation-adjusted record, hitting $103.95 a barrel on the New York Mercantile Exchange before dropping back to $102.45 at the close of regular trading. Judging from trading in options contracts, more investors expect that the price will rise to $105 rather than slide back to the $95 level that seemed unimaginably high just six months ago.
Analysts said that the lofty price reflects tight supplies of high-quality crude oil, nervousness about political and military tensions in oil-producing nations and, above all, a flood of investment coming out of stocks and bonds and flowing into commodity funds. The slide in the dollar to historic lows against the euro is also contributing to the rise in oil prices, which are pegged to the dollar.
"This is not just about supply and demand for oil. It's also about the supply and demand for the dollar," said Daniel Yergin, chairman of Cambridge Energy Research Associates.
The interplay of the slumping dollar and rising oil price has turned one economic dynamic upside down. Just when a weak economy might cause oil prices to slump, they're rising instead, sapping more money from the pockets of already strapped consumers.
After a period last year in which the refining industry absorbed the hit from petroleum price hikes, higher crude oil prices are starting to wash through to prices at gasoline pumps. The Energy Information Administration said yesterday that the average U.S. price for a gallon of regular unleaded gasoline was $3.16, up 3.2 cents from a week earlier and up 65.7 cents from a year ago.
House Speaker Nancy Pelosi (D-Calif.) said the record crude price was a result of President Bush's "failed energy policy."
The latest jump in crude prices comes on the eve of a meeting of the Organization of the Petroleum Exporting Countries tomorrow in Vienna. The cartel, fearful that an economic slowdown might lead to a drop in oil consumption and prices, has been discussing a cut in output. But with prices hovering just over $100 for the past week, analysts and traders expect that OPEC won't act.
"The idea of cutting production in the face of $103 oil seems ludicrous, even to OPEC ministers," said Adam Sieminski, chief energy economist at Deutsche Bank.
OPEC ministers have repeatedly said that they believe international oil inventories are adequate and there is no reason to boost output.
"I can't see them really increasing production at all. There are no reasons for them to. They are enjoying the benefit of high prices," said Abdulsamad al-Awadi, an oil trader and adviser based in Europe. Besides, he said, "OPEC is not really to be blamed [for high prices]. It's these hedge funds which have so much money."