Oil could even top US$105, warns analyst

A Goldman Sachs projection that oil prices could top US$100 ($158.12) a barrel in the event of a major supply disruption could be conservative in the current tight market, said a senior executive with the US investment bank.

Other energy experts told an energy forum in Kuwait on the weekend that global oil market fundamentals point to generally higher energy prices as demand growth outstrips new supply.

"We thought that maybe somewhere within US$50 to US$70 (oil price) we might get the economic damage and that it would take a major, not a minor, disruption to get to the US$105 number," said Arjun Murti, Managing Director at Goldman Sachs.

"If we truly did have a major outage in a major exporting country then US$105 will prove conservative," Murti added at the National Bank of Kuwait energy forum.

Murti said when Goldman Sachs issued a projected range of US$50 to US$105 a barrel in March 2005, actual prices hovered around US$55 a barrel. Oil prices in New York and London traded above US$70 Friday.

Katherine Spector, head of energy research for JP Morgan Securities, said market fundamentals point to petroleum prices reverting to a higher mean in coming years. "The world is running out of easy barrels of crude production," she said, adding that marginal costs of production are rising.

Both Spector and Murti said one factor that the oil markets will remain focused on for the rest of this year would be the US hurricane season after Katrina caused big disruptions last year to refining capacity on the US Gulf Coast.

Hurricanes Katrina and Rita had shown "energy markets are highly susceptible to a supply shock", Murti noted.

Spector said another severe hurricane season predicted for this year was bullish for oil and products prices as are changes to US diesel and petrol specifications this year. But she said among factors that are bearish for the market are relatively comfortable global oil inventories.

Other delegates told the forum that global oil market fundamentals pointed to the possibility of higher prices given that global oil demand is robust and tends to grow every year, especially due to firm demand from China and India.

Edward Morse, executive adviser with Hess Energy Trading Co., said that between 1965 and 2004, total Asian oil demand has risen 620 per cent while world oil demand was up by 158 per cent.

"Asian energy demand growth, especially oil demand, has been truly extraordinary," Morse said, adding that most analysts believe incremental Asian demand growth drives the market.

On the supply side, spare capacity is gone, traditional areas of oil production are mature and areas with growth are geopolitically or demographically challenged, Murti noted.

"We believe that oil markets are in the early stages of what we are calling a multi-year 'super-spike' period," Murti added.

Murti said total non-Opec crude supply has grown in recent years mostly due to Russia, but excluding Russia the supply from producers that are outside the Organisation of Petroleum Exporting Countries has been essentially flat in recent years.

"Effective production capacity -- that what actually can come out of the ground today -- is pretty close to zero," he said. "Our point is not that the Opec countries are running out of oil. But the question is, are we to believe that real-time production capacity is going to grow, year in and year out, to match economic growth?".

- REUTERS