Welcome to the Oil Super Spike Zone

by: Gary Dorsch

Oil prices, which hit record levels this summer, have entered a "super spike" phase that could last for four more years as global demand booms and supply growth slows, Goldman Sachs said. "We disagree with what appears to be a growing consensus that crude oil prices reached their peak levels earlier in 2005," said the firm's Global Investment Research.

Oil demand remained resilient and supply growth lacklustre, prompting them to keep their average U.S. crude price forecast for next year unchanged at $68 a barrel. They predicted oil prices could see 1970's-style price surges to as high as $105 a barrel during this period. "With WTI oil prices on-track to average about $57 a barrel in 2005, we think the past phase will be remembered as the first of what could be a four-to-five-year 'super-spike' phase," their report said.

The bank expressed doubt that OPEC producers, which supply a third of the world's crude, would be able to quench booming demand. "It is the seeming insurmountable challenge of OPEC's needing to add real new capacity on a just-in-time basis that gives us so much confidence that we are in the super-spike phase," it said. The IEA estimated world oil demand ould grow at an average of 1.8 million to 2.0 million barrels per day through 2010. Last year's demand growth of 3 million bpd was the highest for a generation.

The European Central Bank kept up its hawkish tone with chief economist Otmar Issing warning about oil prices and inflation, and Governing Council member Klaus Liebscher calling borrowing costs very low. The ECB would raise rates as required, Issing said, although the central bank has no plan for a series of U.S.-style rate increases.

The ECB raised euro zone interest rates by a quarter point to 2.25 percent in December -- their first move up in five years -- and expect a another rise in March, with rates ending the year at 2.75 percent. Oil prices spiked towards 60 Euros per barrel, challenging the ECB´s goal of bringing inflation below 2 percent. "The risk to price stability has increased in the context of higher oil prices," Issing said, adding that inflation -- which jumped to 2.4% in January, was likely to rise again.

Liebscher expressed concern that the sustained high cost of oil would feed into wages and prices for other goods and services. "Without a doubt, there is still a large danger," he said, citing the German producer price index, which rose by 5.2% in December, its fastest pace for 23 years. Liebscher also fired a warning shot at politicians seeking to persuade the ECB to keep rates unchanged, saying they should "stick to their own domain".

Austrian Finance Minister Karl-Heinz Grasser says current interest rates were right and that he saw no sign of high oil prices causing widespread inflation. Spain's year-on-year consumer price inflation jumped half a percentage point to 4.2% in January, widening the gap with the euro zone. Madrid had already warned higher oil prices would make for a bad figure.


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