I always enjoy it when Goldman Sachs’ crystal ball loses its much-vaunted mystical powers, as it regularly does.
Earlier this year, it forecast that oil would fall to $40 a barrel over the next couple of quarters. At time of writing, West Texas Intermediate is trading at more than $61 a barrel, while Brent Crude is pushing $70.
Crude Facts
The resurgent oil price has taken many by surprise but there was always some degree of inevitability about it.
Depressed prices had the predictable impact of closing down the more expensive US wildcat shale drillers and hitting oil exploration investment generally, which was bound to knock supply at some point.
Although US commercial crude inventories remain close to an 80-year high, they have thinned lately, falling by 3.9 billion barrels in the week to 1 May.
That was the first drop since January, and double the anticipated fall.
Drive Time
The recent fall in the dollar was also to blame, making oil cheaper for those buying in foreign currencies, and stoking demand.
Saudi Arabia’s decision to increase prices for its European customers in June, while holding them flat in Asia, fuelled the upwards price trend.
Saudi needs to keep some of its oil for itself, to fuel peak electricity demand in its baking hot summer. And with the US driving season almost upon us, many investors would expect recent price rises to accelerate further.
Major Money
A 25% rise in the BP (LSE: BP.) (NYSE: BP.US) share price to 464p since its mid-February lows would suggest that the FTSE 100’s oil majors are benefiting from the crude fightback.
But it hasn’t helped Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US), whose share price has stalled in recent months.
Both producers have been hit hard by last year’s halving of the oil price, with Q1 revenues down 57% and 56% respectively.
Rising production, falling capex and profitable downstream operations all offset some of the damage, but what both stocks really need now is a continuing rebound in the oil price.
Nobody Knows
Further progress could prove tricky, however. Stockpiles are still close to record highs. Saudi continues to pump well above its quota. Iran will be keen to get its oil to market, once sanctions eased.
And $70 oil will bring back the shale drillers.
Some analysts claim crude could fall to $20 a barrel, as it comes into line with gas prices. They may be right. Or like Goldman Sachs, they may be wrong.
Buy BP and Shell for their yields, currently 5.13% and 5.46% respectively. Don’t buy them because you think you know where the oil price is going. As Goldman Sachs has shown, nobody does.
