SINGAPORE: Merrill Lynch raised its forecasts yesterday for long-term US light crude prices by 40% to $42 a barrel, a day after bigger rival Goldman Sachs said it expected oil to be around $60 at the end of the decade.
Merrill Lynch’s Global Energy Team also increased its price forecasts for US light sweet crude to $56 a barrel this year, up $6 from its previous forecast, and $52 in 2006, up $10. Oil prices have averaged $53.71 a barrel so far this year.
“We reinforce our long-held theme of capacity tightness across the macro complex,” it said.
“We continue to see a well-supported fundamental backdrop for crude pricing over the next two to three years,” it said, citing limited refining capacity, resilient demand for light products in OECD countries and disappointing production capacity growth worldwide.
However, Merrill expects oil prices to trend lower in the longer term.
“In our view recent strength has been driven by short-term supply disruptions and renewed geopolitical tensions. Longer-term, we believe $60 a barrel oil is unsustainable and expect prices to retrace,” it said.
Goldman, the world’s top financial energy trader, is much more bullish, saying that a lack of investment in exploration and production would keep long-term oil prices around $60.
Even with prices near record levels, Goldman said oil companies were sitting on huge cash piles of nearly $500bn rather than pouring money into new projects because of uncertainty over their profitability.
The two reports highlight analysts’ starkly divided opinions on how the industry will respond to the more-than-two-year rally in oil prices, which topped $67 a barrel last week. US crude traded at $64.35 on Friday, up 48% since January.
Analysts and some governments have called on oil companies to invest more of their windfall profits in production and refining assets to help ease a global capacity squeeze, but many firms remain wary of triggering another bust cycle like the late 1990s.
Goldman also raised its average US oil price forecasts for the rest of this year and for 2006 by $13.50 and $13to $67 and $68 a barrel respectively.
Merrill Lynch said US light crude prices would likely stay around $42 from 2009 as it believes new production capacity should emerge from 2007 and additional refining capacity would surface later. – Reuters