The Energy Report: There Baaaack. It’s alive!

Phil Flynn

http://www.firstenercastfinancial.co...

Jun 05, 2009

There Baaaack. It’s alive! It’s alive! Just when you thought it was safe to go back into the oil market Goldman Sachs decided to raise their oil forecast to $85 a barrel by the end of this year and a 12 month target of $90. Recent oil bears now turned bull have joined the Energy Report In predicting higher prices. Ok, maybe I am mixing movie metaphors but when Goldman Sachs starts to talk bullish the market seems to move like it just got an offer that it just can’t refuse. Of course did the report actually move the market or was the market going to rally anyway? After it looked like just the day before that the oil bulls were beat the Goldman Report told the oil bulls to go out there with all they got and win just one for the Gipper.

It was not just oil that rallied but a basket of commodities across the board. The oil rallied post ECB rate decision as the market was hoping for a more definite plan on how the ECB would execute its extraordinary measures of market stimulus. Oil rallied as the market realized that the chances of the government curtailing spending and getting the budget under control laughable or unrealistic at best. Still the authors of the “Super Spike” and the timing of the release of the report seemed to have some magical effect on the market.

Goldman has had some incredible runs in the market and The Energy Report which was bullish before Goldman’s came out with the” Super Spike” and bearish before Goldman ,turned bullish before Goldman now welcomes them to the bullish side. Now if you are wondering whether or not it is time to follow The Energy Report and Goldman Sachs on the long side of the oil market you've got to ask yourself just one question: 'Do I feel lucky?' Well, do ya, punk?"

The former predictors of the super spike overstayed the party earlier this year as they seemed to be ignoring the real impact the global economic crisis was having on the energy price. When oil moved over $100 a barrel to $147 the spike in oil when beyond the normal supply and demand fundamentals and became a pawn in the quest to seek safe haven from the greatest economic crisis in modern times. Goldman seemed to think the move was all about supply and demand yet they won’t make that mistake again.

In this report they acknowledge that the moves in energy moves at least in this recent rally was predicated by the “unwinding of pricing dislocations caused by the credit crisis. Now Goldman says that as the financial crisis eases, an energy shortage lies ahead. What has been happening in the last few months is a prologue to a price recovery in the second half of the year as the global economy stabilizes and crude inventories decline.

Goldman says that with the risk of further pricing dislocations reduced, we are omitting the prior anticipated price pullback from our forecasts and have raised our 3-month ahead price target to $75 a barrel from $52 a barrel. Easing credit markets have cut financing costs on crude storage, strengthening near-term prices relative to longer-term contracts, or narrowing the so-called contango. The contango is likely to continue shrinking this year as production cuts by the Organization of Petroleum Exporting Countries reduce crude inventories. The key to the anticipated recovery in supply-demand fundamentals will be the willingness of OPEC, in particular Saudi Arabia, to keep production reduced and draw inventories back to 10-year average levels. Even a full return of spare OPEC production will be insufficient to avoid a sharp decline in inventories as non-OPEC production continues to decline amidst rising demand. The Real reason that Goldman has gone bullish is that they expect that global supply growth over the next five years will dwindle to just 650,000 barrels a day—due to lagging investment and output in non-OPEC countries, especially. They expect s non-OPEC supply, about 60% of the world market, to fall by 400,000 barrels a day this year and by 910,000 barrels a day in 2010.Bloomberg News says that according to reports Goldman closed its trading recommendation to sell WTI July crude futures on Nymex, which was put in place on April 17 when the contract cost $54.66. The trade lost $11.56 a barrel. They are recommending buying crude options for the right to buy oil at $85 by June 2010, while selling a contract for the right to buy at $100 a barrel in the same period.

In The Meantime buckle up your seatbelts it is going to be a bumpy Night! Call me to open your account at 800-935-6487 or email me at pflynn@alaron.com. Also call to find out about the new array of services that I can offer you with our new parent PFG Best! And as always see me each day on the Fox Business Network!!