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Risk of Oil-Price Surge Rising on Supply, Goldman Sachs Says

Thursday, 23 February 2012 | 11:00
A narrowing gap between the supply and demand for oil is increasing the likelihood that prices will “spike” higher, according to Goldman Sachs Group Inc.
Concerns of potential supply disruptions have increased as tensions between Iran and Western nations escalate, David Greely, Goldman’s head of energy research in New York, said in a report today. Spare production capacity among the members of the Organization of Petroleum Exporting Countries has fallen to “dangerously low” levels at a time that the world’s demand is recovering, Greely said.
“We believe that stronger-than-expected demand against limited inventory and scarce excess production capacity leaves the market vulnerable to price spikes in the near-to-medium term,” Greely wrote. “Oil looks increasingly compelling from the long side both as an outright position and a hedge.”
The bank continued to recommend investors buy Brent contracts for July 2012 to take advantage of rising prices, also known as taking a long position in the market.
Brent crude futures traded in London have gained 13 percent this year as the European Union and U.S. imposed sanctions to protest Iran’s nuclear program, prompting the Middle East’s second biggest producer to halt exports to France and the U.K. The contract for April settlement slid 14 cents, or 0.1 percent, to $121.52 a barrel on the London-based ICE Futures Europe exchange at 2:08 p.m. Singapore time. It closed yesterday at the highest since May 3.
Brent’s premium to West Texas Intermediate has “more room” to narrow to the bank’s twelve-month target of $4 a barrel, the report showed. The spread will decline as more pipeline and rail capacity becomes available to ship crude from the Cushing, Oklahoma, storage area to refineries along the U.S. Gulf Coast, according to the note.
Front-month contracts traded at a spread of $15.35 a barrel today. The price difference reached a record $27.88 on Oct. 14
Source: Bloomberg
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