Oil Rises, Heads for Third Weekly Gain, After Goldman Forecast

By Christian Schmollinger and Ben Sharples

June 5 (Bloomberg) -- Crude oil rose in New York, poised for a third weekly gain, after Goldman Sachs Group Inc. said prices may reach $85 a barrel by the end of the year as demand recovers and supplies shrink.

Oil surged to a seven-month high yesterday and gasoline climbed after the bank increased its year-end forecast from $65. The dollar’s drop over the past six weeks has boosted crude prices as investors buy commodities as an inflation hedge.

“It’s the funds that are pushing the market higher,” said Jonathan Kornafel, a director for Asia at options trader Hudson Capital Energy in Singapore. “When everyone reads the same report and comes to the same conclusion, then you’re going to have the market moving in one direction. The general trend is for the dollar to get weaker and for crude to get stronger.”

Crude oil for July delivery rose as much as 71 cents, or 1 percent, to $69.52 a barrel on the New York Mercantile Exchange. It was at $69.40 a barrel at 11:20 a.m. Singapore time. Yesterday, the contract rose $2.69 to $68.81, the highest settlement since Nov. 4 and the biggest gain since May 18. Prices are up 4.6 percent this week.

The U.S. Dollar Index, which values the greenback against a basket of international currencies, has dropped 5.5 percent since May 7, while crude has gained 22 percent.

“It really has been driven by pretty strong inflows from funds and that’s been encouraged by quite significant weakness in the dollar,” said Toby Hassall, an analyst at Commodity Warrants Australia Pty in Sydney. “Given the momentum crude seems to have at the moment, $85 as a high for 2009 doesn’t seem unreasonable.”

Goldman Forecast

Oil posted its biggest monthly gain in a decade in May on speculation a global economic recovery will trigger a rebound in demand. This increase is a “prologue” to a price recovery in the second half of the year as the global economy stabilizes and crude inventories decline, Goldman said.

“As the financial crisis eases, an energy shortage lies ahead,” Goldman analysts Jeffrey Currie in London and David Greely in New York wrote in a research report e-mailed yesterday. The bank set a 12-month price target of $90 a barrel, up from $70, and forecast $95 for the end of 2010.

Goldman’s New York-based energy equities research team, led by analyst Arjun Murti, in March 2005 predicted a “super spike” in prices. In May last year, Murti said oil may rise to between $150 and $200 a barrel within two years. The team revised its forecast after prices then slumped from a record $147.27 in July.

Gasoline Jump

Gasoline for July delivery rose 2.09 cents to $1.9830 a gallon at 11:27 a.m. Singapore time. Yesterday, it gained 6.05 cents, or 3.2 percent, to end the session at $1.9621, the highest settlement since Oct. 9.

Travelers taking to U.S. roads during the Northern Hemisphere summer typically cause a spike in gasoline demand. Motor fuel consumption last week jumped 2.2 percent from a year ago because of more driving during the Memorial Day holiday, MasterCard Inc. said on June 2.

A government report on June 3 showed that U.S. crude-oil inventories unexpectedly rose last week as fuel consumption dropped.

Crude-oil supplies climbed 2.9 million barrels to 366 million in the week ended May 29, according to the Energy Department. A 1.5 million-barrel decline was forecast in a Bloomberg News survey. The gain occurred as imports jumped 9.9 percent and refineries increased operating rates to the highest in six months. Fuel demand fell 900,000 barrels to 17.7 million barrels a day last week, the lowest since May 1999.

‘Weak Fundamentals’

“Fundamentals are still weak in the oil market, with crude inventories in the U.S. at 19 year highs and the International Energy Agency last month revising down their forecast of world oil demand,” Ben Westmore, a minerals and energy economist at National Australia Bank Ltd. in Melbourne, wrote in a research report e-mailed yesterday.

Brent crude for July delivery rose as much as 59 cents, or 0.9 percent, to $69.30 a barrel on London’s ICE Futures Europe exchange. It was at $69.16 a barrel at 11:31 a.m. Singapore time. Futures rose 4.3 percent to end yesterday’s session at $68.71 a barrel, the highest settlement since Oct. 21.

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net; Ben Sharples in Melbourne bsharples@bloomberg.net