Goldman Keeps $85 Oil Target on China’s ‘Robust’ Diesel Demand

By Yee Kai Pin

Oct. 26 (Bloomberg) -- Goldman Sachs Group Inc. maintained its forecast for crude oil to reach $85 a barrel by the end of this year on “robust” demand for diesel in China, the world’s second-largest energy consumer.

“Chinese oil demand is leading the way and U.S. oil demand is lagging behind,” Goldman analysts led by David Greely said in a report dated Oct. 23 and made public today. “We are likely to see a recovery in which strong emerging-market oil demand puts upward pressure on crude oil prices.”

China posted a 600,000 barrel-a-day increase in refined- product demand in the third quarter as its economy grew 8.9 percent, said analysts at the bank. While Asia’s second-biggest economy became a net exporter of diesel because of refining capacity expansions, domestic demand for the fuel reached “new highs” in August, the Goldman analysts wrote.

Crude oil in New York has gained 79 percent this year, reaching a one-year high of $82 a barrel Oct. 21 as traders bet on improved prospects for a global economic recovery. Oil for December delivery on the New York Mercantile Exchange traded near $80 a barrel today.

Goldman, which predicts oil will average $82.50 a barrel in the fourth quarter of this year and $110 a barrel in 2010, said fundamentals are headed in the “right direction” even as demand in the U.S., the largest consumer, remained slow.

Weekly Energy Department data showed a 9.5 million-barrel decline in the country’s product inventory over the first half of October, providing an “effective catalyst” for oil to break out of a $65 to $75-a-barrel range it has held since June, the bank said. Still, U.S. distillate demand “must improve” or risk pushing prices lower.

“The past two weeks have shown distillate demand firm near 3.5 million barrels a day, but we are still waiting to see further improvements in the distillate space,” the analysts said.

U.S. distillate stockpiles have declined after reaching 171.8 million barrels in the week ended Oct. 2, the highest since January 1983, according to the Energy Department. Inventories including heating oil and diesel were at 169.9 million barrels in the week ended Oct. 16.

To contact the reporter on this story: Yee Kai Pin in Singapore at kyee13@bloomberg.net