Goldman Sachs: Oil Headed to $99

 |  Includes: DBO, OIH, OIL, USO, XLE
by: Cullen Roche

It’s almost like bad case of 2008 deja vu. Goldman Sachs says oil is going to $99 in the next 12 months as Bernanke’s reflation experiment drives prices higher. According to their analysts, energy and metals prices have “broken out” of their trading range and could head higher:

Energy and industrial metals prices break out of recent trading ranges, rising to the highest levels seen since 2008. After trading in an increasingly narrow range in March, energy and metals prices broke out to the upside as March rolled into April, with WTI crude oil prices rallying above $85/bbl.

We expect the supply-demand balance to continue to tighten in 2010 as the global economic recovery continues to strengthen demand, draw inventories and draw OPEC spare capacity back into the market.

Based on the improving fundamentals they see oil prices touching $99 at some point in the next 12 months. Of course, this doesn’t mean the oil market is without risk. Goldman sees potential policy risks and still believes the economic recovery could falter:

While we remain confident that oil prices will continue to strengthen as the global economy recovers against a supply backdrop that remains constrained, policy risks to the economic recovery remain. While we continue to expect the supply-demand balance to tighten, significant downside risk remains should the market’s concerns regarding a slowdown in economic growth be realized. As we move further into 2010 and even 2011, we think the market’s focus will increasingly turn from the downside risk from demand to the upside risk from supply.

How to play it?

Goldman wants to buy December 2010 NYMEX WTI and June 2010 NYMEX WTI call struck at $85/bbl.

Source: GS