Goldman Cuts Oil Price Forecasts on Financial Crisis

By Nesa Subrahmaniyan

Oct. 13 (Bloomberg) -- Goldman Sachs Group Inc. lowered its crude oil price forecasts for a second time this year after the global financial crisis deepened.

Goldman reduced its estimate for U.S. benchmark West Texas Intermediate crude for the fourth quarter to $75 a barrel from $110, and cut its year-end target to $70 a barrel from $115, Goldman's commodity research analysts, led by London-based Jeffrey Currie and Giovanni Serio, said in a report today.

``We clearly underestimated the depth and duration of the global financial crisis and its implications on economic growth and commodity demand,'' the analysts wrote in the report. ``Should the financial and evolving economic crisis cut deeper into demand, the market could fall as low as $50 a barrel'' in December.

Arjun Murti, the New York-based Goldman Sachs equities analyst who predicted a ``super spike'' in oil prices in March 2005, on Sept. 17 slashed his 2009 forecast to $110 from $140 as demand slows. Global oil demand has declined as a financial crisis in the U.S., the world's biggest energy consumer, spreads and banks pinched by the credit squeeze tighten lending, tipping the world economy close to a recession.

Goldman's Currie and Serio lowered their forecasts for 2009, with the average for the year reduced to $86 a barrel from $123. The bank's end-2009 target was cut to $107 a barrel from $125. The latest forecast is Goldman commodity team's second downward revision this year, after a cut on Sept. 16.

July Record

``It's a drastic reduction,'' said Victor Shum, senior principal at energy consultant Purvin & Gertz Inc. in Singapore. ``Maybe they are foreseeing even worse to come and there's more downside risks than upside risks to oil right now.''

Murti, a managing director at Goldman and head of Americas equity energy research, said in May that oil prices may rise to between $150 and $200 a barrel within two years as growth in supply fails to keep pace with demand.

New York crude oil has fallen 45 percent from a record $147.27 a barrel in New York on July 11 as demand deteriorated and the weaker outlook in Europe and Asia lifted the dollar, reducing the appeal of commodities priced in the U.S. currency.

``The worst is likely already upon us, but the key will be the duration of credit issues,'' Currie and Serio said. The ``point of maximum weakness for oil demand is likely occurring right now while the credit markets are locked.''

IEA Forecasts

U.S. oil demand is down more than 10 percent in the last week from a year ago ``due to rampant de-stocking and credit- induced disruptions in the supply chain,'' the analysts said.

The International Energy Agency, an adviser to 28 nations, has cut its forecast for global oil demand next year by 0.5 percent as the worst financial crisis since the 1930s threatens a global recession.

The IEA lowered its 2009 projection by 440,000 barrels a day to 87.2 million barrels a day, the Paris-based agency said Oct. 10 in its monthly report, citing a weaker economic outlook from the International Monetary Fund.

The global credit crisis has damaged the outlook for oil demand as it has become clear it will have a deep and lasting impact on ``forward economic activity'' as the bank's economists lowered global economic growth forecast to 3 percent from 3.7 percent, the Goldman commodity research analysts said.

The credit market turmoil has made it difficult to predict the direction of oil prices, the analysts said.

West African crude shipments to Western markets have fallen 35 percent in October from September, the analysts wrote in the report, citing 95 percent of shipping fixtures.

In 2009, the bank expects long-dated oil prices to remain around $95 a barrel, and lower prices may allow demand to return after being restrained by high prices in 2008. That has prompted the bank to forecast demand to fall by 400,000 barrels a day instead of 600,000 barrels a day based on its economic growth prediction of 3 percent.

The Organization of Petroleum Exporting Countries may need to cut output by 700,000 barrels a day in January 2009 to maintain a balance between supply and demand, the analysts said.

To contact the reporter on this story: Nesa Subrahmaniyan in Singapore at nesas@bloomberg.net.