Business | Investment
From recovery to oil price surges
Last week Goldman Sachs' "Energy Watch" led with the headline: "As the financial crisis eases, an energy shortage lies ahead".
- By Sean Kelleher, Special to Gulf News
- Published: 00:04 June 14, 2009
Dubai: Last week Goldman Sachs' "Energy Watch" led with the headline: "As the financial crisis eases, an energy shortage lies ahead". For Goldman, the energy shortage will include a four-stage oil price rally over the period 2009 to 2010. More of that later.
For the thinking-man, experienced investor, Goldman's piece is further evidence of the sentiment now doing the rounds: global recovery will stimulate asset prices. The sub-message is: asset prices must have been at their bottom or remain at a "near-to-bottom" level. And, given the nature of the absolute historic bottoms, it leads to the question: where is the opportunity?
At the highest level, the opportunity is in the trend: "the trend is your friend". My news channels have changed their business desk backdrop headlines from words depicting a "global meltdown" to words depicting an "economic recovery". It's a tentative start, but add-in global equity surges, where on a medium term (five years or so basis) prices were and are ridiculously low. Locally, we can also add in the UAE surge. I entered two local brokerages during this week where there was some euphoria with the six-day surge. It will make a difference on local brokerages' 2009 profitability; "we need about three months positive trading per year to make a profit" said one prominent broker, which leaves enough of 2009 left to make the year a reasonable one.
Now start adding in the green shoots of property recovery both around the world and in the UAE, and there seems to be a sense of widespread cautious optimism. Yet for those still suffering from the memory of equity price crashes, the scars will take a long time to heal. The quickest way to heal the scars and benefit from the opportunities is to diversify.
This takes us to the Goldman's piece and the "energy opportunity" being led by their expectation of a four step oil price rally. This week's story then is about oil (energy), a story of one asset class opportunity within a macro-economic story of opportunity.
Goldman's paper is a revision of their previous guesstimates. In essence, they believe "the recent [oil price] rally was driven by credit normalisation, the market has not yet priced in an economic recovery". They believe that as the economic recovery unfolds, four stages of an oil price rally will unfold.
We are into the first stage, "WTI prices rallied to our end-of-year target of $65 per barrel by the end of May", implying that they were being forced into a revision.
Where next? For Goldman's, they expect the next stage to be in the second half of 2009, featuring a cyclical bull market and stabilisation with the end result being an end-of-year price at around $85 per barrel (revised up from the original figure of $65 per barrel).
Stage three for Goldman's will be in the first half of 2010, featuring a "structural bull market as long dated prices rise to motivate renewed Non-Opec (Organisation of Petroleum Exporting Countries) production capacity investment while Opec spare capacity returns to the market in an attempt to bridge the gap". Their price forecast for this period being $90 per barrel (revised up from $70 per barrel).
Stage four is the far-off second half of 2010 featuring a "likely return to energy shortages "because ultimately, the economic recovery and associated recovery of demand will not have been factored into the production side fast enough. Taking the Goldman's forecast to $95 per barrel. Sounds like a price we have seen during previous euphoria's?
Investing into an oil price rise is one logical "opportunity" arising from the paper. Embedded in the paper is some concern arising from their view that the global economic position has been tainted by two and not one drama. The obvious "financial crisis" and the not-so-obvious "energy crisis".
With the financial crisis it is/was possible to get further into debt. With the energy crisis, as the paper says, "you can't consume what you don't have". The challenge for the "energy crisis" lies in how to deal with the imbalance between demand and supply. And whilst that imbalance persists there will be an impact on world economic growth and it will remain fairly difficult to predict the effect on future oil prices. Warned we are.
- The writer is managing partner of Financial Partners/Mondial.
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