A quiet read while we have a quiet wait :) >>Oil at $105..!...

A quiet read while we have a quiet wait :) >>

Oil at $105..!
05.04.05
UK-Analyst


Don't panic, Captain Mainwaring...
Says Garry White, Stockmarket reporter at UK-Analyst.com





These recommendations do not constitute advice,
please read the risk warnings.

The analysts at Goldman Sachs have been looking in their crystal balls and - quite frankly - their cup is half empty. At least when it comes to the oil price, that is. It was a brave call from the esteemed brokerage on Thursday of last week - and one that probably sent George W Bush's army of spin doctors into a complete Dervish. Goldman predicted that the oil price could see a "super spike" in the next few years - rising to more than twice the current record levels - and way higher than the sky high prices seen in the energy crisis of the 1970s. It said WTI oil futures could surge to $105 dollars in the next few years and the bank even called its forecast 'conservative' if there were major supply disruptions in producing areas. Adjusting for inflation, WTI would have to rise above the 80-dollar a barrel level to be at the equivalent level seen in the 1970s, so this would indeed be a very significant movement.

The note said that that the broker believed oil prices would not fall until the price was high enough to meaningfully reduce energy consumption and recreate a spare capacity cushion. Goldman continued to say that perhaps the ultimate answer to how high oil prices needed to go before demand destruction occurs was derived from knowing when American consumers will stop buying gas-guzzling sport utility vehicles and instead seek fuel efficient alternatives. Based on its analysis of gasoline spending and the current economic climate, the broker estimate that US gasoline prices may need to exceed $4 a gallon. The price of gas in the US currently stands at around $2.15 per gallon – so we have some time yet before this would happen, if their calculations were correct.

Markets had a knee-jerk reaction to the statement and oil stocks have been supported since the statement, while other stocks, particularly oil-dependent stocks such as chemicals groups and airlines, fell. The note was obviously of concern to global investors, as an oil price in excess of $100 a barrel could cripple economies worldwide. But the real question is whether this is a reality or not? Do we believe them?

Well, the scenario is a definitely possibility. We can't take that away from Goldman Sachs. The real question is whether this is probable. Predictions are notoriously unreliable – even from those individuals and organizations that should know more than you or I. There is a famous quote from Irving Fisher, former professor of economics at Yale University in the US, which illustrates this point. In 1929 he said that, "stocks have reached what looks like a permanently high plateau." Well, we all know what happened next – global markets crashed. People in business can be even worse at making predictions. In 1943, the then chairman of IBM Thomas Watson said that he thought that the total world market for computers would be 5. How wrong could he have been?

Oil analysts were notoriously bad at increasing their oil price assumptions as the price of crude soared over the past few years. The oil price assumptions from most major brokers bore no relation to reality. Why on Earth should we believe them now? We are not dismissing the claims by Goldman Sachs outright. It is possible that oil could see a "super spike," but we think the probability of it happening is much less. Oil prices at this level would be a political nightmare for the US - the government would run down the country's strategic reserves to keep prices low. These predictions are a doomsday scenario. UK-Analyst expects a high oil price for some time to come, that's why we recommend having a heavy weighting of oil-related companies in your portfolio, and particularly oil services groups such as Abbot. However, we are sceptical about whether the price will hit $100. UK-Analyst.com's glass is half full, unlike the one at Goldman Sachs.



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