Goldman predicts new oil rally after current plunge

London/New York: Goldman Sachs, which in April predicted last week's major correction in oil prices, said on Friday that oil could surpass its recent highs by 2012 as global oil supplies continue to tighten.

The Wall Street bank, seen as one of the most influential in commodity markets, said it did not rule out a further short-term fall after Thursday's near record drop, especially if economic data continued to disappoint.

But the bank reaffirmed its traditional long-term bullish view of oil, helping crude to pare some of its earlier heavy losses on Friday. And it wasn't alone: JP Morgan took the bold step of raising its oil price forecasts for this year by $10 (Dh36.72), becoming the most bullish of 27 forecasts in a Reuters poll.

Supply constraints

"While financial bushfires or perhaps a rapid resolution to the Libyan civil war could radically alter market dynamics, the balance of both risks and fundamentals still points to a supply-constrained world," JP Morgan analysts, including Lawrence Eagles said in a note late on Friday. They said oil would rise to $130 in the third quarter to check demand. Goldman, meanwhile, stuck largely to the same view it first aired three weeks ago — a medium-term correction followed by a renewed ascent.

"It is important to emphasise that even as oil prices are pulling back from their recent highs, we expect them to return to or surpass the recent highs by next year," Goldman Sachs' analysts said in a research note.

"We continue to believe that the oil supply-demand fundamentals will tighten further over the course of this year, and likely reach critically tight levels by early next year should Libyan oil supplies remain off the market," it said.

Oil prices remained extremely volatile on Friday, roiled by better than expected US jobs data, which eased fears about global economic recovery that contributed to a 10 per cent price crash on Thursday.

Goldman said it believed last week's correction in oil prices, which fell from above $125 per barrel of Brent crude to below $106 on Friday, was sparked by disappointing economic data releases and US oil inventory data.

"The sell-off yesterday [May 5] has likely removed a large portion of the risk premium that we believe has been embedded in oil prices, which could suggest further downside may be limited from here."

At 12.30pm EDT (1630 GMT) on Friday, Brent crude was up $1.05 at $111.85 a barrel, having earlier hit a 2-1/2 month low of $105.15. US crude was down 5 cents at $99.75 a barrel, having earlier dropped to $94.63 a barrel.

Rocking markets

Goldman rocked markets in April by calling a nearly $20 fall in Brent, saying speculators had pushed prices ahead of fundamentals.

Goldman was one of the first banks to predict $100 oil last decade, in 2005 when prices were closer to $50 a barrel, but it stayed bullish for some time after oil peaked at $147 in 2008.

"In terms of timing, Goldman got it [the crash] right this time. Well done," said an oil trader with a major rival bank.

"It [last week's fall] was a move driven by macro funds after US and German data disappointed and [European Central Bank President Jean-Claude] Trichet did not deliver on yet another rate rise," he said.