Goldman Sachs: Expect oil prices to soar to $85 by December

Wall Street's largest commodity dealer Goldman Sachs is bullish on oil. This week, Goldman raised its end of year target price from $65 to $85.

Goldman cites all the usual suspects... dwindling supply growth from non-OPEC members... increasing demand. The firm ads that oil could hit $100 by 2010.

Race to the Arctic: The New Source of Oil and Gas?

U.S. Geological Survey suggests that the area north of the Arctic Circle has an estimated 1,670 trillion cubic feet of natural gas – 2/3 the proved gas reserves of the entire Middle East – and 90 billion barrels of oil. Most of the gas is concentrated in Russian territory

Wood Mackenzie suggested that Arctic basins, hold 233bn of discovered oil and gas and another 166bn that has yet to be found, the vast majority of it gas

Market Reflections 1/30/2009

Fourth-quarter GDP, at -3.8 percent. proved weak but far from "staggeringly" weak like the White House warned just yesterday. The Chicago purchasers' report and the Reuters/University of Michigan consumer sentiment report point to continued but non-accelerating contraction so far in the first quarter. Optimism that the government will create a "bad bank" to absorb troubled bank assets, optimism that has helped the stock market over the past week, was deflated by a CNBC report that warns the plan, to be unveiled next week, lacks both details and means of funding.

Company news was headed by strong profits from oil giants Chevron and Exxon Mobil, the latter posting a record $45.2 billion profit in 2008. Oil companies are yet to show the effects of the collapse in oil prices. Despite the collapse in oil prices, refinery workers are threatening to go on strike over the weekend, news that added support, but only moderate support, to oil and gasoline prices. Oil ended little changed at $41.60.

Money moved out of risk and into safety during the session. The Dow industrials fell 1.8 percent while the dollar gained nearly 2 cents against the euro to end at $1.2794. Yields in the Treasury market moved slightly higher.

A big gainer on the day was gold which rose 2.2 percent to $929.90. But more important than the gain was a jump in open interest indicating that hot money, that is hedge funds, are back in gold.

Market Reflections 1/28/2009

The FOMC statement wasn't a surprise but the stock market's rally may well be described that way. The Dow industrials surged 2.5% on reports that the administration is setting up a "bad bank" that will absorb bad debt from financial institutions. Bank shares posted big gains led by Wells Fargo, up 31 percent, Citigroup, up 19 percent, and Bank of America up 14 percent.

The stock market has been rallying all week, gains however that do not reflect strength in underlying earnings. Earnings in fact are proving significantly weaker than expected as weakness spills out far beyond the financial sector. Many are labeling the gains a bear market rally that could crumble on a run of bad economic news, such as for instance a big drop in durable goods orders or a big spike in jobless claims, reports to be issued tomorrow.

The FOMC statement pointed to a major risk that economic recovery may not take hold this year. The Fed said it will do everything it can to help the economy including kicking off a new program, called TALF, that will be aimed at unlocking credit for consumers and small businesses. The Fed said it may also begin buying Treasuries but it didn't commit itself, a fact that pushed money out of the Treasury market with the 3-month yield up 5 basis points at 0.18 percent and the 30-year up 17 basis points at 3.41 percent.

Huge swelling in stocks of crude oil couldn't hurt oil prices which like stock prices have proven resistant to bad news lately. February crude ended up slightly at $42.28 though talk is heavy in the oil market that prices may soon dip back to last month's $32 - $33 low for the now expired January contract. The move in stocks gave accounts confidence to sell gold which ended about $10 lower at an $889 level that is still very close to $900. The dollar ended little changed at $1.3152 against the euro.

The Oil Price Conundrum 2

Food for thought:

• Why aren’t the big oil exporters all over this trade?Could it be these guys don’t actually have all the spare capacity they’re letting on?
• Why are the drillers and oil service names so depressed? Stock markets are supposed to discount the future, not the past. Equity valuations are supposed to be forward looking. And yet, at current multiples, most of the high-quality drillers and oil service names are trading as if oil were headed to $20, not back to $60. Yet the December crude contract says otherwise... and the huge spread between near-month and far-month contracts persists. What gives?
• Could Wall Street still be “broken” in the aftermath of 2008? After the year we just went through, anyone who still believes in perfectly efficient markets should have their head examined.
• Could December crude contracts be expressing an opinion on the inflationary effects of U.S. debt monetization... or rebound possibilities for emerging markets... or both? It’s widely recognized that the U.S. Fed and Treasury are embarking on a “great experiment” now that has never before been tried – one that could be summed up as, “Print like crazy and see what happens.” Some observers, like Joachim Fels of Morgan Stanley’s Global Economics Team, further believe that emerging markets could outperform in 2009 due to better internals than they get credit for. Could the persistent crude spread be reflecting both views?

Dont rightly know, but its worth watching closely what happens.