Oil supply will be “critically tight” in 2012 and prices are likely to surpass their recent highs as spare production capacity and inventories are “effectively exhausted,” analysts at Goldman Sachs said in a research note Thursday.
Goldman also reiterated a recommendation that its clients buy some forward oil contracts now, before prices move higher later.
This advice underlines the influential bank’s skepticism at the ability of the Organization of Petroleum Exporting Countries to meet rising demand. It also sets it at odds with the view of other important players in the oil market, notably the International Energy Agency.
Goldman said it expects the expanding global economy to drive oil-demand growth that outstrips production growth, meaning, “the oil market continues to draw on inventories and OPEC spare capacity in order to balance.”
“It is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices,” Goldman said. “We recommend opening a long position in the ICE Brent December 2012 contract, as we expect that the market will continue to tighten to critical levels by 2012.”
Goldman’s estimate of the amount of oil production that OPEC holds in reserve—its spare capacity—is smaller than that of many other analysts, mainly because of differing views over the ability of the group’s kingpin, Saudi Arabia, to increase output.
The International Energy Agency, which represents major energy-consuming countries, estimates that Saudi Arabia is capable of producing up to 12 million barrels of oil a day, compared with actual production in May of nine million barrels a day. This would give the Saudis plenty of headroom, even after they increase production to 10 million barrels a day as they promised last month.
Goldman, by extrapolating from the previous Saudi production peak in 2008, believes this figure is significantly lower at between 10.5 million and 11 million barrels a day. Saudi Arabia has three-quarters of OPEC’s total spare capacity.