Goldman expects 'explosive' commodities, oil rising to $175

By Claudia Carpenter and Alexander Kwiatkowski
Bloomberg News Service
Friday, March 14, 2008

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aUmQ3MBOkx_0

Commodities may have "explosive rallies" in the next couple of years, with crude oil rising to $175 a barrel, according to Goldman Sachs Group Inc.

Political decisions on money flows, labor, and technology are "substantially constraining supply growth" of commodities, Goldman analysts including Jeffrey Currie in London wrote in a report today. "This will likely support the ongoing structural bull market in commodities until these policy-driven investment constraints are removed and/or demand is adjusted."

Commodities are in their seventh year of gains as underinvestment in refineries, mines and land sent prices for oil, gold, platinum, and wheat to records. More natural resources are controlled by political entities than at any time since the 17th century, according to the Goldman report.

Oil rose to a record $111 a barrel yesterday as the tumbling value of the dollar attracted investors to the crude market. The U.S. currency yesterday fell below 100 yen for the first time since 1995 and dropped to an all-time low against the euro. A weak dollar draws investors to oil as commodities become cheaper for buyers using other currencies.

Crude at $175 a barrel "represents the price level required to maintain trend economic growth against our anemic supply growth forecasts, assuming growth in the U.S. re-accelerates early next year," Goldman said.

OPEC has cut its production forecast for countries that are not members of the organization, citing lower output from western Europe, North America, and Mexico.

Non-OPEC production will run at a rate of 50.37 million barrels a day this year, the Organization of Petroleum Exporting Countries said today in a monthly report, cutting its previous projection by 160,000 barrels a day. OPEC crude production averaged 32.09 million barrels a day in February.

Oil prices, which have risen 15 percent so far in 2008, remain above most analysts' forecasts for the whole year. The front-month West Texas Intermediate futures contract on the New York Mercantile Exchange has averaged $96.53 a barrel so far in 2008, about 17 percent higher than the median price for the whole year forecast by 30 analysts surveyed by Bloomberg of $82.25 a barrel.

Saudi Arabian Oil Minister Ali al-Naimi told reporters this month in Vienna the level of about $60 to $70 a barrel may now act as a floor for oil prices because renewable energy sources have become viable at those levels.

The International Energy Agency, an adviser to 27 industrialized nations, will hold a closed-door "brainstorming" session in Paris next week to discuss oil prices. Participants will include representatives from financial, trading, producing, refining and economic institutions.

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