Analysis: Oil’s rangebound 2010 catches out price bulls

By Alex Lawler

LONDON (BestGrowthStock) – An oil market that has traded mostly between $70 to $80 a barrel in 2010 has caught out some of the oil bulls on Wall Street calling for higher prices, and some now see rangebound conditions prevailing into 2011.

Goldman Sachs in January expected the benchmark U.S. oil price to average $94 a barrel this year, the highest forecast in a Reuters poll at the time. Its latest prediction is $80, close to the actual 2010 average so far of $77.90.

Barclays Capital predicted $85 for this year in January. The bank trimmed its forecast to $78 a barrel last week, citing “macroeconomic disquiet” for the revision.

“The gradual recovery in oil prices is likely to prove slower and bumpier than our earlier estimates,” said Costanza Jacazio, an analyst at Barclays. “We continue to see limited downside from current levels, however.”

The revisions suggest any continuation of oil’s bull run is likely to be deferred, something consumers and governments around the world would welcome at a time of concern about the pace of economic growth.

Prices had soared from 2002 until mid-2008 as demand led by emerging economies such as China strained supplies, peaking at a record high near $150 in July 2008. Oil collapsed to below $40 by December as the economic crisis hit demand.

Demand has risen this year but so have inventories, which are at a record high in the United States. Supply from outside the Organization of the Petroleum Exporting Countries has also been stronger than expected.

Banks such as Barclays and Goldman produced some prescient calls on the oil price during the boom. Goldman energy equities analyst Arjun Murti, in 2005, was one of the first to predict $100-a-barrel crude.

Barclays in 2004, when oil was trading at the then-extraordinary level of $40 and many pundits expected the boom to fade in 2005, instead accurately called for the rally to persist.

MOST ACCURATE SO FAR

So far this year, the Wall Street bank that has most accurately forecast prices is J.P. Morgan, based on data collected in Reuters polls.

In January, it expected an average of $78.30 and in August predicted a price of $77.25.

“We believed there would be more supply-side flexibility,” said Lawrence Eagles, global head of oil research at the bank. “As a result of that, we’ve seen a much more balanced market.”

Economists at OPEC, which as the producer of more than a third of the world’s oil has good insight into demand levels, also made an accurate call on the oil price.

The group said in April oil would probably trade around $70 and $80 a barrel in coming months.

While many analysts expect prices to move higher in the medium term, forecasts for next year have been coming down.

Barclays reduced its 2011 price forecast by $7 to $85 last week. Its previous 2011 prediction of $92 was more than $8 above the consensus in the latest Reuters poll.

Goldman currently has the highest 2011 oil price forecast of the big Wall Street banks at $98.50. It declined to comment on any changes to the prediction.

Barclays says prices could prove to be firmer than it expected should sentiment about the economy become more optimistic or if political tension over Iran and in Iraq — both major oil exporters — worsened.

J.P. Morgan’s prediction for next year is only a little higher than this year’s at $79.25.

“There is still a lot that could change over the course of the next few months, but the odds favor a relatively rangebound market even going forward over the next 12 months,” said Eagles.

(Additional reporting by Christopher Johnson; Editing by Alison Birrane)

Analysis: Oil’s rangebound 2010 catches out price bulls