Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS) have suggested that their clients buy oil futures now. Between them, they believe Brent crude prices will settle between $120 and $130 this year.
Brokerage firms, like credit agencies, often give advice which might have been valuable in the past, but often comes after the fact. Crude prices have recently retreated by 15% to 20%. The argument the two companies make is that simple supply and demand will change as the year passes. That may well not be the case.
The arguments for an increase in oil prices are OPEC’s unwillingness to raise supplies and concerns that turmoil in the Middle East will hurt production. Those issues, however, have already been factored into prices unless the unrest worsens significantly. For instance, Saudi Arabia, the world’s largest oil producer, has kept its citizens happy enough so that the amount of political dissent there is close to none.
China is usually the largest swing factor in global oil demand. Recent PMI numbers from the People’s Republic show a slowdown in factory output increases. There are also credible rumors that finished goods have piled up at China’s ports and other transportation centers. An inventory glut could keep manufacturing facilities shuttered for months. China has also increased interest rates four or five times in the last six months to dampened increased inflation. The action should also keep GDP growth modest along with demand for energy.
Oil prices are obviously affected by actions well beyond China. Japan is the second largest net importer of crude. The earthquake there has caused a new recession. The American economy slowed in the last quarter. Economic troubles in the EU region are in the headlines every day.
The Goldman and Morgan Stanley forecasts may end up right, but their correctness would have to be based on factors most people cannot see.
Douglas A. McIntyre