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Goldman Expects ‘Swift, Violent’ Oil Rally After Low Near $30
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By Grant Smith

Jan. 19 (Bloomberg) -- Goldman Sachs Group Inc. commodity analyst Jeffrey Currie said he expects energy prices to have a “swift and violent rebound” in the second half of the year after slumping to near $30 a barrel.

Oil prices may test the low of $32.40 reached in mid- December before rebounding to $65 by the end of this year, the analyst said. In the short term, “bearish fundamentals” will dominate as the support from the conflict in Gaza and Russia’s gas dispute subsides, Goldman said in report e-mailed today. There is scope for a “new bull market” in oil, Currie said.

World oil demand is likely to fall by about 1.6 million barrels a day this year, the Goldman analyst said today at a conference in London. That’s bigger than the reduction expected by the International Energy Agency, which last week forecast a drop of about 500,000 barrels a day, or 0.6 percent.

“Thirty dollar oil reflects the same imbalances that got us to $147 oil,” Currie said at the conference. “The problems haven’t gone away. We still believe the day of reckoning is to come.”

Infrastructure constraints throughout the oil industry, from supply to transportation and storage, mean that despite the demand slump, “this is not 1982-1983 all over again,” Currie said. “The supply picture’s radically different, the demand picture’s radically different.”

“The key difference is that today there are no large-scale next generation projects that are going to save the world,” he added. “Commodity demand is exponentially higher than it was.”

New York crude futures for delivery in December, trading near $56 a barrel today, currently cost some $15 a barrel more than March futures, a market situation known as contango, where prices are higher for later delivery.

Contango Flatten

The contango is likely to flatten as supply cuts by OPEC and other supplier take effect, reducing the availability of oil for immediate delivery, and as producing countries sell futures contracts, Currie said.

A recent tactic of using supertankers to store crude oil to take advantage of higher prices later this year is “difficult” to profit from and is “near the end of this process” anyway, the Goldman analyst said.

Traders seeking to exploit this contango structure face the problem of either finding a location willing to harbor their tanker for a prolonged time, difficult for environmental reasons, or else spending part of their profit on fuel to keep the ship in motion.

The Organization of Petroleum Exporting Countries started another round of supply cutbacks at the start of this month. The group’s compliance with its overall efforts to cut production will probably peak at 75 percent, or a reduction of about 3 million barrels a day out of an announced aim of 4.2 million barrels a day, Goldman Sachs said.

Canada, North Sea

“If OPEC production cuts turn out to be sufficient, then we’ve probably already seen the bottom,” said Currie.

Countries outside OPEC, in particular the U.S., Canada and North Sea producers, will restrain output by 600,000 barrels a day, Currie said. Non-OPEC cuts will have a deeper price impact than those by OPEC because they involve an actual reduction in investment, rather than just output, that shutter oilfields for a longer period, he added.

In several steps, 10 OPEC members have pledged to reduce production to 24.845 million barrels a day, a cut of 4.2 million barrels a day from September’s level.

To contact the reporter on this story: Grant Smith in London at [email protected]

Last Updated: January 19, 2009 11:57 EST