Market News

 June 22, 2010
Goldman Sachs Cuts Crude Oil Price Forecasts Because of 'Fragile' Markets

 Goldman Sachs Group Inc., the most profitable bank in Wall Street history, reduced its price forecasts for crude oil because commodity markets are "fragile" on concern growth in Europe and China will slow.

West Texas Intermediate oil, traded in New York, was forecast at $100 a barrel in 2011, down 9.1 percent from its previous prediction of $110, Goldman said in a report today. The bank also downgraded prices for three-month, six-month and 12- month crude and for Brent oil, traded in London.

"Commodity markets are generally rebounding strongly off their lows but sentiment remains fragile on European and Chinese concerns," said analysts led by New York-based Allison Nathan. "Markets will remain fragile until there is further evidence that sovereign pressures are stabilizing and global trend economic growth remains intact."

Oil in New York has gained more than 10 percent so far in June, set for the biggest monthly increase since October, amid speculation global demand for fuels will recover as Europe overcomes its debt crisis. Futures yesterday reached a six-week high of $78.92 a barrel after China, the world's second-largest energy consumer, signaled an end to the yuan's fixed rate to the dollar, a move that may boost the country's purchasing power.

"We have lowered our three-month oil and base metals price forecasts but to levels still above current prices, and maintain a positive medium-term view of key commodities," the analysts said.

Goldman said the market is "overestimating" any negative impact of government policies on growth and has discounted possible constraints on oil supply in the future.

'Too Bearish'

"Sentiment is too bearish on both the sovereign-debt risks as well as the effects of macroeconomic momentum slowing," the analysts wrote. "Despite some macro slowing, absolute growth indicators are still firmly positive."

WTI, a low-sulfur crude, is the reference grade for futures contracts on the New York Mercantile Exchange. Brent is quoted in oil contracts at the London-based ICE Futures Europe exchange.

"Implied demand for key commodities has remained at exceptionally high levels in the emerging markets," the Goldman analysts said. "Developed market demand has generally surprised to the upside."

WTI contracts for December delivery have gained $3.40 a barrel since a May 10 buy recommendation, according to the report.

Global fuel consumption will increase 2 percent this year to a record 86.4 million barrels a day, the International Energy Agency predicted June 10.