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Goldman Sachs hikes Q2 Brent crude price forecasts amid unrest in Libya

Goldman Sachs hikes Q2 Brent crude price forecasts amid unrest in Libya

Research by Goldman Sachs (NYSE:GS) suggests that the Libyan crisis that has put oil prices at 2.5 year highs could keep Brent crude above US$100/barrel until at least July this year.

The firm said yesterday that it has hiked its forecast by US$4.5 to US$105/barrel, which is still almost US$10 below the current price level of nearly US$115/barrel.

Oil prices have risen sharply over the past month after unrest that hit the Middle East and North Africa region late last year spread to the oil rich Libya, halving its oil production and sparking fears of a supply shortfall.

Saudi Arabia had to step in and raise production to bring down the prices after Brent nearly hit US$120/barrel and US crude rose above US$100/barrel on the New York Mercantile Exchange (NYMEX).

Goldman noted that the Organization of Petroleum Exporting Countries (OPEC) is running out of spare capacity, slowly losing its ability to make up for the shortfalls in Libyan production.

There is hope that the unrest could soon come to an end as the North African country’s ruler Muammar Gaddafi has indicated that he would be ready to give in to the demands of the protesters and step down - putting an end to violenct clashes between pro-government forces and the rebels that has already claimed thousands of lives -, if given a pile of cash and immunity from prosecution.

However, it is still unclear whether Gaddafi will be able to get out of the country on any terms and in that case, how quickly Libya would be able to restore production at normal capacity.

According to Goldman’s estimates, the OPEC has less than 2 million barrels of spare capacity left. The report also noted that Saudi Arabia’s production might have been higher than the official figures at the time when mass protests kicked off in Libya last month.

On top of that, there is still a chance that Saudi Arabia itself could become the scene of mass protests. The kingdom has recently banned any demonstrations after several protests took place following the arrest of a Shiite cleric, who called for a constitutional monarchy.

The US has also taken action to calm the markets, indicating that it could tap into its strategic reserves, something that it has only done twice before, after gasoline prices have surged over the past month, rising by US$0.5 per gallon on average and reaching US$4 per gallon in at last four states.

This, however, would only provide a short term solution to the soaring oil prices and should tensions in the greater Middle East remain high, it is likely that the prices will stay at least at current levels or rise further.

Rising oil prices are jeopardising the ongoing economic recovery, driving up energy costs and inflation in Asia, which could prompt China to go for further monetary policy tightening to slow growth in consumer prices.

Oil and gas companies have performed very well so far this year in the wake of the surge in oil prices. Tullow Oil (LON:TLW) has surged from 1,250 to the current 1,481 pence, Cairn Energy (LON:CNE) rose from 420 pence to 447 pence and BG Group advanced from 1,300 pence to 1,462 pence.

Meanwhile, FTSE 100 specialist banking and asset management group Investec (LON:INVP) seems to be even more bullish on Brent, having upgraded its forecasts for the first half of the year from US$90/barrel to US$110/barrel.

Back in June 2009, Goldman correctly predicted oil prices to hit US$85/barrel in 2010 and said that crude oil would reach US$100/barrel by the end of the year, citing an anticipated decline in global supply growth that would take place over the next five years, reducing it to 650,000 barrels per day.

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Brent Crude Oil Timeline

November 23 2011

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