Kate Mackenzie Goldman’s renewed bullishness

Jeffrey Currie at Goldman Sachs has expanded on the bullish case made two weeks ago at a presentation to investors.

Equity markets, the presentation says, have been trading on expectations of emerging markets growth, but this emerging market sentiment has in turn created rising inflation expectations and higher commodity prices.

The markets have been trading the EM growth story, not inflation expectations, which are a result of the EM growth story.

Currie re-iterated the $95 target by December 2010.

The Goldman thesis is that a four-part recovery process will be seen in over the next few years:

2009H1: Bridging the gap to economic recovery
WTI time spreads strengthened as an inventory dislocation was avoided and as the
credit dislocation unwound, which allowed a normalization of the WTI time spread inventory

2009H2: A cyclical bull market as the economy stabilizes
WTI time spreads to continue to strengthen in a cyclical crude oil rally, but OPEC
holds the key in the near-term.

2010H1: Long-term shortages generate near-term surpluses
Rising WTI crude oil prices amidst weakening time spreads as long-dated prices
rise to motivate investment in non-OPEC production capacity.

2010H2: From financial crisis back to energy crisis
WTI time spreads strengthen once again as dwindling supply leads to a new
cyclical rally.

Izabella has more on the Goldman presentation here.

As we observed with the analysts’ note two weeks ago, Goldman doesn’t believe in a geological supply crunch:

Like the financial crisis, the energy crisis requires a policy response as the problem is more political than geological

This is how they see large projects playing out over the coming decades:

And yes, Goldman has made some good calls on oil, but its recent record has drawn scepticism. From the FT earlier this month:

Goldman’s influence on oil markets surged after it predicted correctly in March 2005 that prices could suffer a “super-spike” to $105 a barrel. This was at a time when crude was trading at $55 a barrel and its call was well above the consensus.

Since then, some of its forecasts, such as last summer’s call for oil to rise to $200 a barrel, have proved wide of the mark.

Then the bank changed tack dramatically as oil prices fell in the second half of last year.

This year, it forecast that prices would average $30 during the first quarter.

Related links:

A very bullish presentation from Goldman (FT Alphaville, 18/06/09)
Goldman Sachs and the unrecognised oil crisis (FT Energy Source, 04/06/09)