When Goldman Sachs analyst Arjun Murti wrote a note to clients two years ago predicting a superspike in oil, most of the analyst community were sceptical. Murti was one of the first to forecast an oil price above $100 a barrel.
However, I suspect Mr Murti is now laughing at his detractors – and, I hope, pointing out to them how wrong they all were. At that time, for example, Deutsche Bank was forecasting that oil in 2010 would hit a staggering $35 a barrel… Give that analyst a large bonus… not…
Murti predicted that oil prices would rise high enough to meaningfully reduce energy consumption – something that had not happened since the 1970s. There have been a number of calculations of the inflation adjusted oil price peak of the 1970s, with the consensus that it represents a price today of between $101-$109 dollars. We are still significantly below this peak. So Murti’s theory about consumption has not been tested… yet…
He argued that the US economy was now less reliant on oil so the nominal price for a barrel would have to hit $105 for it to prompt a significant move to reduce consumption. However, he added to this view in December 2006. The Goldman analyst said that his $105 a barrel estimate may even be conservative if the peak oil theory was correct.
Now, as I have noted before in this column, analysts never seem to forecast the oil price correctly. Indeed, in January this year, many analysts were predicting that the oil price would retreat below $50 a barrel; how wrong they were. Now, more and more of the overpaid spreadsheet people are starting to accept the inevitable – the oil price is going to stay high.
Investec fund manager Tim Guinness has forecasted that a supply crunch could result in the oil price hitting $150 a barrel by 2010. I do not believe this is an unreasonable view.
Oil price : a new all-time high
We have had a new intra-day, all-time high for the oil price this week. Opec raised its production for the first time in more than two years – but it was too little too late. The International Energy Agency said this week that world oil supply fell by 430,000 barrels per day in August to 84.6 million barrels per day – and it indicated supply issues could continue well into next year.
The body, which advises 26 member countries, said that project delays and extended field outages were risks to 2008’s supply growth. The agency expects demand to rise 1.7% year on year in 2008.
Many commentators have put the rise in oil price down to speculators and they predict the price will ease. With concerns about economic growth being very real, we may very well see a retracement. However, you must remember that bull markets don’t rise in straight lines. They go up sharply, get ahead of themselves, have a correction, then start rising again. I believe this is the position now.
Analysts have consistently underforecasted the oil price. The overpaid number crunchers at Deutsche Bank were predicting a 2010 oil price of $24 a barrel just three years ago. How ridiculously separate from reality is this? They weren’t just a bit wrong; they were astonishingly, embarrassingly wrong.
So, after wracking their brains very vigorously as oil spiked, Deutsche analysts decided that $24 a barrel was too low and raised their estimate to $27 a barrel… then in February 2005 Deutsche raised its forecast to $32 a barrel… then to $35 in July 2005… and to $40 in September 2005. It stayed at that level until June 2006, when the analysts upped their forecasts to a whopping $45 a barrel…
Would you pay these people a six-figure salary to do their job so badly…? I wouldn’t.
There are very few oil analysts that have got it right. Arjun Murti’s analysis is the most convincing I have seen – but with the rest – as Deutsche Bank has shown, are useless.
The oil price is likely to move higher. Buy shares in an integrated oil company today.
This article is taken from Garry White’s free daily email ‘Garry Writes’. For more information please Garry Writes