Forecast of higher prices prompts investors to buy oil

Associated Press

NEW YORK Fri, May 16 2008

— Oil futures blasted to a record near $123 a barrel Tuesday, gaining momentum as investors bought on a forecast of much higher prices and on any news hinting at supply shortages.
A new Goldman Sachs prediction that oil prices could rise to $150 to $200 within two years seemed to motivate much of Tuesday’s buying, although a falling dollar and increasing concerns about declining crude production in Mexico and Russia contributed, analysts say.
The Energy Department raised its oil and gasoline price forecasts, but also predicted that high prices will cut demand more than previously thought.
Light, sweet crude for June delivery jumped to a record of $122.73 a barrel before retreating to settle up $1.87 at $121.84 on the New York Mercantile Exchange.
Oil prices have nearly doubled from about $62 a barrel a year ago, which Goldman sees as a sign that the world is in the midst of a “super spike’’ in oil prices. Analyst Arjun Murti said in a research note released Monday that prices would ultimately force demand to fall sharply.
Not everyone shares Goldman’s view. Tim Evans, an analyst at Citigroup Inc., countered Goldman’s analysis with a note predicting that crude prices could as easily fall to $40 a barrel as rise to $200 over the next two years because supplies are, as Evans put it, comfortable.
James Cordier, president of Tampa, Fla., trading firms Liberty Trading Group and OptionSellers.com, said Goldman’s prediction isn’t necessarily new: “We’ve heard numbers like these out of Goldman Sachs, especially over the last 12 months.’’
Indeed, it’s not the first time Murti has espoused a super spike theory; in an April 2005 note, he predicted the oil market was in the early stages of an unprecedented rally that would send prices from a then-record of about $57 a barrel to $105.
But some investors respond to such predictions by buying, Cordier said.
At the pump, meanwhile, the national average price of a gallon of regular gas slipped 0.1 cent overnight to $3.61, according to AAA and the Oil Price Information Service.
“You’re going to see new highs for gas prices, probably for the weekend,’’ said Cordier, who predicts an average price of $4 a gallon in the coming weeks.