The Leader of the Pack

Back in early 2002, oil was trading at less than $20 a barrel. Before it began its northward march from that point, Fitz-Gerald – a longtime energy bull – conservatively predicted that oil prices would reach $100 a barrel within 10 years.

Ultimately, Fitz-Gerald’s prediction came true – and then some, as crude prices smashed through the psychologically key “century mark,” and kept going. But back in December, when oil prices were still trading about $90 a barrel, Fitz-Gerald reassessed the market and publicly boosted his target price to $187 a barrel, a level he said crude prices would hit within three years.
The prediction – and the timing – is important to note. The reason: The target price ran counter to the conventional wisdom of the time, since most analysts were describing the spike in energy prices as a speculative “bubble” fueled by fearful investors. At the time, most argued that prices had risen because of temporary imbalances that would work themselves out.

That wasn’t the case then, and it’s certainly not now.

“Many people think high oil prices are a bubble. Maybe, but not for long and certainly not given the growth in global demand,” Fitz-Gerald said at the time. “Of course, prices will not stabilize anytime soon. Savvy investors [will realize that] we are still in the very early stages of a generational game with the potential to be played for great profits.”

Observations like that seemed to embolden a small group of analysts to re-assess the market. And most of them were longtime energy bulls, just like Fitz-Gerald.

For instance, in late February, Matthew R. Simmons, chairman of the Houston-based investment bank Simmons & Co. International, and another longtime oil bull, actually predicted that oil prices could climb as high as $378 a barrel – characterizing current prices in the $100 range as “preposterously cheap.”

To underscore his point, Simmons told the Arabian Business news service that in the United Kingdom capital of London, gasoline can sell for as much as $9 a gallon. And even that doesn’t deter motorists from driving their cars.

Prices at that level don’t “seem to have slowed anyone down. It works out as much as $378 a barrel. Yes [I can see it reaching that high],” he told the Middle East news service.
Money Morning’s global research team continued to track both oil prices, and the key catalysts that helped set them.

In mid-March, global supply concerns, a falling dollar and geopolitical uncertainty combined to help oil and gasoline prices to hasten their advance – and that prompted Fitz-Gerald to reiterate his $187 price-target prediction; the response was stunning: Not only was that mid-March Money Morning report picked up by other news services and reposted on Web sites all over the world, our report once again seemed to induce other analysts to finally turn bullish.

Just days after that Money Morning report appeared, there was a surprising development: Wall Street heavyweight Goldman Sachs Group Inc. (GS) followed suit and said that crude oil prices could hit $175 a barrel in the next few years as supply constraints touched off “explosive rallies” in the commodities sector.

Goldman Sachs said $175 a barrel crude “represents the price level required to maintain trend economic growth against our anemic supply growth forecasts, assuming growth in the U.S. [economy] re-accelerates early next year.”

Because it was released overseas, the Goldman report seemed to lack the impact of a later version. Even so, it wasn’t the last oil bull to embrace a viewpoint close to Money Morning’s.
In late April, noted MSNMoneycentral columnist James Jubak predicted that crude prices would soar to $180 a barrel in the next few years, a prediction that was again well-covered by Money Morning.

Just days later, Standard & Poor’s Inc. analysts took a Contrarian viewpoint – or, sort of. S&P analysts said that the price of crude oil would stabilize, or even drop, by the end of the year, thanks to an expected U.S. recession – even if that contraction was “mild and short.”

However, S&P analysts gave themselves a pretty wide margin of error: Although their year-end target was set at $91 a barrel for crude oil, the S&P analysts cautioned that their estimates could range as much as $50 a barrel on either side of that mark.

In other words, S&P’s estimate for year-end oil prices range from $41 t o $141 a barrel.

On April 24 – that same week – CIBC World Markets Inc. analysts released a report predicting that U.S. gasoline prices would hit $7 a gallon within four years as oil prices jumped to $200 a barrel.
Articulating a point that Fitz-Gerald has been making for years, CIBC analysts said that crude supplies are actually lower than some official estimates indicate, while demand is unlikely to fall anytime soon. The result: These tighter supplies and continued strong demand will drive oil and gasoline prices to roughly double their current levels by 2012.
“It is increasingly clear that the outlook for oil supply signals a period of unprecedented scarcity,” CIBC analyst Jeff Rubin told MarketWatch.com. “Despite the recent record jump in oil prices, oil prices will continue to rise steadily over the next five years.”

None of that sounds good. Ironically, however, it was a Goldman Sachs prediction issued – or should we say, reissued – Tuesday, which seemed to re-ignite the oil rally. The investment bank handed out a May 5 research report that projected crude oil prices hitting $150 to $200 a barrel in the next six to 24 months. Except for a bit more urgency in the timing, this prediction differed little from the forecast released back in March – although the afore-mentioned earlier forecast was distributed overseas and possibly only trickled back into some U.S. financial publications (we should note, however, that Money Morning carried that earlier report).

Whatever the reason, this time around the prediction (which MarketWatch.com described as “dire”) sent crude oil prices up over $122 a barrel almost instantly.

Pages: 1 2

Pages: 1 2