Goldman Sachs predicts $150-$200 a barrel oil in six months

As the price of oil began steadily climbing two years ago The Fueling Station has consistently predicted that it was unlikely to go back down, contrary to what some analysts were confidently predicting. So, it comes as no surprise that a new report by Goldman Sachs says the price of crude oil could soar to $200 a barrel in as little as six months, as supply continues to struggle to meet demand.

This comes as US light crude passed the $126 mark for the first time.

Oil prices have now risen by 25% in the last four months and 400% since 2001.

I am not an oil expert. But the current problem is not about oil itself, which is why so many of the "experts" have gotten it wrong. It's about the geo-politics of oil. If you pay attention to political events around the globe it's not hard to see why the price of oil is rising. The signals are not hard to find. The volatile situation in the Middle East, as well as corruption and rebel activity in Nigeria, coupled with fast-rising demand from the emerging economies of India and China, falling production in Mexico and Venezuela, and tight refining capacity in the United States, was bound to disrupt the oil industry. Add commodity speculators into that mix, and you have the answer to rising oil prices.

- David Adams

We have featured all of this aspects of the oil industry on our blog, which has helped me put together the big picture in my mind of where we are right now. I have no idea if oil will reach $200 in the next six months. But Goldman Sachs was one of the institutions that got it right two years ago, so I wouldn't be at all surprised if they are proved right again.

The next question is whether rise oil prices is altogether a bad thing. Just as Barack Obama argued successfully last week, lifting the gas tax doesn't really help anyone in the long run. Higher gas prices will in fact probably help teach us to conserve our fuel better, increase consumer demand for fuel efficient cars, and speed up the next generation of alternative fuel vehicles.

While it may be an uncomfortable transition for Americans who depend on their car for work and getting kids to and from school, they should take a moment and ask how it is that Europeans manage to cope even though they pay the equivalent of $10 a gallon for gas. We really shouldn't be complaining about $4 a gallon.

If politicians were thinking sensibly about this they might consider taking some kind of measure to help truck drivers who are being hit especially hard right now. Maybe the government could offer them some kind of extra tax break on their gasoline and diesel bills.

Click here to read more about Arjun Murti's Goldman Sachs report.

Comments

[cltsig]

Marc - That tax deduction for large SUVs for business owners was in place long before Bush was. It was there during the Billary era or did your fact machine not tell you that?

[Daniel]

Jorge, finally someone who is making sense. Oil is being used as a financial instrument to hedge against the weak dollar, it is not only going up because the dollar buys less but because investors have been fleeing the weak dollar seeking a safe haven and finding oil. It only cost $4 to buy a barrel of oil on margin for heaven sakes. Where would you invest if you were a hedge fund? 50% margin for stocks or less than 4% for oil? Go to the head of the class if you said oil. The Dems want to impliment a windfall profits tax, BAD IDEA Mr Obama!!!. The last time there was a windfall profits tax on oil, domestic production dropped and we had shortages. Raise the margin requirements or just allow companies that will actually use the oil, like airlines and trucking companies to buy futures. That will end the oil futures speculation and oil would drop to $60 a barrel.

[Marc]

cltsig...part right, but in a large part wrong.

The tax deduction was available during the Clinton administration. It was meant for Farmers and small business owners that used large fleet vehicles such as large pickups (3/4 and 1 ton), cargo vehicles, tow trucks etc. After the year 2000-2001 the SUV and large Truck craze kicked into high gear so 6,000+Lbs vehicles that were previously not available to the general public began to appear including the:

Cadillac Escalade ESV
Chevrolet Avalanche 2500
Sierra Denali
GMC Yukon XL
Chevrolet Tahoe
Hummer H1 & H2
Chevrolet Trailblazer
Dodge Durango
Land Rover
Range Rover
Lincoln Navigator
Lincoln Blackwood
Mercedes ML55 AMG
Porsche Cayenne,
Toyota Sequoia 4WD
Toyota Tundra 4WD Access Cab
Ford Excursion
Volkswagen Touareg
Ford Expedition
...there are others, but the above were vehicles that didn't exist until the 'keep up with the Joneses' crowd starting to buy them to carry around the wife and a baby seat.

In 2001 after 9/11 the Bush administration expanded the rebate from $25,000 to $100,000. This was done solely to help the sales of h2 Hummers (yes records show that GM and Ford lobbyists specifically asked for this to help their large SUV strategic sales plan).

So guess what currently there is a bill by the Democrats asking to recind the expansion from 25k to 100k and bring it back to 25k where it should be (if not abolished completely).

IMHO there should be a rebate for electric and hybrid cars...not for those monster SUVs. Especially since Farmers now are cleaning up with the rising corn, wheat and rice prices.

[Daniel]

Tino, that is some ROTTEN advice to buy oil company stocks. Energy was down today because many investors believe oil may be peaking. Remember the stock market is a predictor of FUTURE events. Your advice is like telling someone to buy housing stocks in 2004 or internet stocks in 1999. NOT a good idea for those who did. Besides, western oil companies only own LESS than 10% of the know oil reserves, they have complicated agreements with foreign governments to drill in those countries. The higher oil goes, the less they get to keep. As prices go up, oil companies have to pay more for the product themselves. That is a big reason their profit margin is only 8% and dropping. Exxon, despite what seemed like high profit numbers, dissapointed the street and their stock price dropped when their profit was announced last week. Maybe you should stick to your day job instead of giving bad stock tips.

[paminator]

Any environmentalist who advocates increased energy taxes (either direct taxes or carbon trade/cap schemes) to avert 'climate catastrophe' should be cheering loudly that gas prices are so high. This is the alleged mechanism that will curtail gasoline and energy consumption- raise the price consumers have to pay. It also impacts electricity prices. As utilities see reductions in electricity demand (due to a slowed economy because of high gas prices), electricity rates will have to increase to maintain shareholder expectations. Higher electricity rates may result in further reductions in electricity demand, exacerbating the effect.

If these high energy prices are the fault of George Bush and the administration, then I expect to see the UN, the EU, Greenpeace and newspaper editorials thanking them profusely for making a potentially profound impact on CO2 emissions. Who knows...George Bush and Teddy Roosevelt may turn out to be our most environmentally responsible presidents!

[Tino]

Daniel,

I guess you are right. I have been getting beaten up by people for recommending oil & gas stocks for the past decade: "Oil for $100? Gas for $10? Are you insane?"

Unlike houses and internet stocks, demand for oil & gas will continue to outstrip supply. When that is no longer true, then I'll be selling. However, I do not see that occurring for a long, long time.

Forget XOM. Look at pure play E&P companies that are growing their drilling portfolios.

paminator, tell your kids that they can't play their video games, work on the computer or watch the big screen TV. Electricity demand growth is being driven by consumer electronics and will not be falling any time soon, either.

Complaining about high energy prices and those big, bad companies may make you feel good, but it won't make you any money. Buy energy and sleep better at night.

[Tino]

The comparison of an internet-boom stock (with billions in market cap based on no earnings and no revenues) and an oil & gas company (sitting on billions of dollars of natural resources underground) shows the laughable ignorance of many on this discussion board.

I was also surprised to find out that higher oil prices mean lower profits for oil & gas companies. I'm going to have to ponder that one for a while.

[Tom]

I think its likely that we will hit $150/bl oil. Geopolitical climate is certainly cooperating. Rebel attacks on oil installations in Nigeria, Israel's assertion that Iran is less then a year away from having the bomb, and now evidence that Chavez is directly supporting Colombian rebels.

From the economic standpoint. we've gone from a week dollar, to being caught in an inflationary cycle. It goes beyond current events and is a result of ever increasing debt (as individuals and a nation) by a country that produces hamburgers and health care.

Be thankful its not worse then it is. Gasoline is the cheapest it has been relative to oil price in 20 years. Gasoline crack margins are expected to be under $2.00/brl (that's $.05/gallon) in the 4th qtr. Hardly worth the effort except that diesel margins are great (but you only get 10 gallons from a barrel vs. 19 for gasoline) and demand is so strong we are now actually exporting diesel fuel. That's because our economy is dropping relative to the rest of the world. If it were not for ethanol, which is a little less then 10 pcnt of the fuel supply, gasoline prices would be much higher. Ethanol is about $0.90/gallon cheaper (net of blenders credit) to the gasoline wholesalers then regular unleaded. So ethanol has helped gasoline supplies and US economy (domestically produced good, foreign produced bad) but government policy is hardly surgical. The tariff should be on a sliding scale as well as the blenders credit. I think they should give the blenders credit directly to the consumer. Make it a credit on my debit card when I buy fuel.
Finally, one cannot discount the huge influence hedge and index funds have on commodity exchanges. They are overwhelming the "commercial" interests that use the exchanges to hedge physical transactions and thereby, the price exceeds the fundamental value. Usually the momentum they create makes the position right. Eventually the market sorts it all out.
Best to keep politicians influence at a minimum and more important, try to keep those influencing the politicians at a minimum.

[Daniel]

Tino, as long as you are going to invest in oil companies, it is probably a good idea to find out who really owns the oil. It is laughable and ignorant of you to think western oil companies are "sitting on billions of dollars of natural resources underground".
Western oil companies only control less than ten percent of the worlds oil reserves. Exxon was recently sanctioned by the SEC for OVERSTATING their reserves for the sake of their investors and stock price, now they want the SEC to change the way reserves are counted. The majority of the oil that oil companies pump is on foreign soil. In order to pump that oil they usually make what is called "production sharing agreements" These are complicated agreements that usually state that the higher the price of oil goes, the LESS the western oil compnaies get to keep. They are basiclly buying the oil themselves. So when the price goes too high, their margin starts to shrink. This from a recent Businessweek article "Host countries are renegotiating existing contracts to achieve better terms than the industry offered as recently as a decade ago, when oil prices were low; some are nationalizing assets.(can you say Venezuala?) New contract terms are tougher, too. For example, "[r]ecent auctions of exploration blocks in Algeria, Libya and Egypt have yielded terms that many executives believe won't generate returns to compensate for ever-higher risks." Yes, margins are shrinking as prices go up.
Oil companies profit margins are around 8%, compared to "internet boom companies" who I like to call software companies, who have profit margins over 25%.
As Tom pointed out, gas prices have not kept up to oil prices and refiners profit margins are around 4%.
http://www.msnbc.msn.com/id/24411755/

[Tino]

I was unaware that XTO Energy, Suncor, Chesapeake, Pioneer, Southwestern, and dozens of others did not own the hydrocarbons that they are sucking up and selling at margins of 50% or more.

I don't stay awake at night worrying that those nasty governments of Texas, Oklahoma, Alberta and Louisiana are going to expropriate their assets before they can grow at double digit rates for the next decade. Thanks for worrying about that for me.

Every reason you gave (government taxation, international drilling difficulties) raises the price of oil & gas, yet you think that this is a negative for all oil & gas companies. I am learning more and more from this blog every day!

[Daniel]

Tino, Your inclusion of Alberta with US States, illustrates your ignorance. Alberta is in Cananda. There is not enough oil in the states you mention to power the state of California much less the entire country, what don't you understand about "WESTERN OIL COMPANIES ONLY CONTROL LESS THAN TEN PERCENT OF THE WORLDS OIL" So if 90% is not under their contol, don't you think THEY have to buy it or have some type of arrangement with where ever it is they do get it? Those arrangements state that the higher the price goes, the less they get to keep for themselves.
So you don't think that taxation or a "windfall profit tax" will harm oil co. stockholders and the companies themselves? The last time there was a "windfall profit tax", domestic production dropped. The tax is based on how high the price goes. Obamas WPT is a tax on everthing over $80 a barrel. So you don't think that will cut into profits?
I didn't mention international drilling difficulties but rather foreign Governments changing exsisting contracts which change the dynamics of profit margin. Who cares if the price is increasing if these companies are getting a smaller cut of the pie. Look at that link I posted, towards the end of the article they give oil companies profit margin compared to banking, software and drugs.
BTW, Suncor's profit margin is 15%, not 50%. Pioneer drilling co is 13% not 50%, Southwestern energy is 18% not 50%. I hope you are not a broker giving out this eroneous info, you will end up getting sued.
By comparison, the seven top "internet boom companies" took in $92.3 billion in revenues and earned $23.6 billion in profits which is 25%. The companies you mentioned matched the eight big banks, subprime problems and all, with $41.3 billion profit on revenues of $267.3 billion, which is 15%.
Happy investing.

[Tino]

Pioneer (PXD) saw gross margins of 56.6% last quarter. I'm not sure where you found your financial information.

I re-read my post and didn't see where I said that Alberta was a state. I'm not sure how you decided that it was.

Yes, a windfall profits tax would raise the cost of production. Yes, it would probably reduce domestic production. If production falls, what would that do to prices?

All of your facts point to higher oil & gas prices, which is fantastic news for North American E&P companies. That is why they are up 5-10 fold in the past few years and will continue to grow at double digit rates.

[linda]

hey melissa you are the dumbmest person i've ever met i can't believe am youre friend

[Daniel]

I gave you the profits for Pioneer drilling company, PDC. If you want to mention companies names that have multiple listing in the same sector, you should give symbols to reduce confusion. BTW PXD had a net profit margin of 16.67% last year
http://moneycentral.msn.com/detail/stock_quote?Symbol=PXD

Also, when you make sarcastic statements like "I don't stay awake at night worrying that those nasty governments of Texas, Oklahoma, Alberta and Louisiana are going to expropriate their assets before they can grow at double digit rates for the next decade." You are implying that Alberta is not in a foreign country when in fact it is. You also grouped it with states, which it is not.
You seem to ignore the fact that US oil companies DEPEND on foreign governments who are nationalizing oil projects and leaving the US companies on the outside looking in. They used to need the US companies and their capital, now with oil so high they are doing it themselves or are making agreements where US companies get a smaller piece of the pie. Who care how high oil goes if they don't own the land OR the oil and are just like us and have to buy it at high prices.

[George]

$200 a barrell of oil even $300 a barrell! What a joke! Idiots leading idiots!!