After a choppy trading day, crude oil nevertheless rose more than 3% just days after Goldman Sachs (GS) raised its price forecasts for Brent crude. In notes published Monday, May 23, Goldman, reversing its commodity bear call just six weeks ago, boosted its year-end target for Brent by 20% to $120 per barrel from $105 and its 2012 forecast to $140 from $120. Goldman also raised its Brent price target to $115, $120 and $130 a barrel on a three-, six-, and 12-month horizon.
The inspiration for Goldman’s new-found commodity bull? Ongoing supply disruptions in Libya and the belief that firm demand in emerging markets will eat into OPEC spare capacity. So everything all of a sudden changed 180-degrees in just six weeks. Really?
"Firm Demand" From Japan?
First of all, the global growth outlook, according to Goldman’s own forecast, has gotten worse since the firm told clients on April 11 to sell a basket of commodities -- including oil, copper and cotton -- and stay "underweight" in raw materials.
Goldman just this month downgraded China’s 2011 GDP growth forecast to 9.4% from 10.0%, cut its US growth forecast to 3% from 3.5%, and also shaved projection for the broader Asia region as well. So if the current, supposedly more robust growth from China could not take crude oil to $120, where would the “firm demand in emerging markets” come from on a reduced China growth outlook? I guess it must be from Japan, as it is about the only major economy Goldman actually upgraded. From Goldman’s report (via Zero Hedge):
Contrary to popular opinion, we believe the disaster will accelerate -- rather than delay -- Japan's exit from deflation. We see reconstruction demand and exports driving gross domestic product growth to an above-trend pace of 2.5 per cent in 2012.
