Goldman sanguine on high oil prices; Industry execs, not so much

Oil prices rose yesterday as Goldman Sachs stated it expects prices to reach $85 by the end of the year from its current level just below $70. Its analysts believe the recent price increase is the first stage of a longer sustained rally. They are right to see oil price rise over the long-term as demand increases and supply tightens due to limited investment and capacity constraints, however, they seem a bit overly optimistic. Oil executives are less sanguine in the near-term.

“It does kind of feel like the market is getting ahead of itself. The demand has not increased.

Larry Nichols, chief executive of Devon Energy Corp

“It’s more perception than reality… A lot of people think we bottomed out — I tend to think otherwise. So I wouldn’t be surprised to see a pullback in oil prices.”

Steve Farris, CEO of the exploration company Apache Corp

“It’s been our firm’s view that the fundamentals of the market would suggest a lower price — a $40 or $50,” Spears said. “In the range of that. Not $70.”

Richard Spears, vice president of Spears and Associates consulting firm.

Goldman pins the forecast on increasing demand in China, a notoriously difficult market to predict because of a lack of reliable statistics. It is the same reason for the basis for their prediction last year that oil may hit $200. Although predicting this market is difficult, and few with the notable exception of Ed Morse at Lehman Brothers (my old firm) predicted the fall in oil’s price last year, Goldman still seems a bit far out ahead of the pack. When fundamentals don’t support current oil prices, and industry leaders that benefit from high prices are perplexed with the high prices, Goldman’s call is bold.