Oil prices seen trading above $105/bbl in 2008

It's happened - the oil market has decoupled from the stock market. But don't expect that to mean lower oil prices.

So says Goldman Sachs in its latest  Energy Weekly report that "after trading from the beginning of the year in near lock-step with the equity markets, crude oil prices have decoupled and moved sharply higher as economic growth concerns have been trumped by the same long-term structural supply issues that have driven the energy price rally during the past decade."

On that backdrop, Goldman is maintaining its forecasts that envision oil prices trading above $105/bbl during the second half of this year.

Goldman Sachs notes that in the past two weeks WTI crude oil prices have rallied by nearly 15 percent off their lows, and in effect joined the base metals and agriculture markets in a broad-based commodity price rally.

"Across the commodities complex, most commodities are now at or above the peak price levels reached at the beginning of the year. However, the cyclical and structural composition of today’s commodity prices are significantly different from the end of last year when they were last near these price levels," according to Goldman Sachs. 

That's because, says Goldman Sachs, most commodity prices, including oil prices, are now characterized by much weaker forward timespreads, the cyclical component of prices, which is consistent with the economic concerns and weaker demand outlook.

The impact of this cyclical weakness on overall price levels, however, has been more than offset by much stronger long-dated prices, the structural component of prices, which has pushed outright spot prices to new all-time highs, according to the report.

"Although prompt WTI crude oil spot prices have been near our forecasts, the cyclical weakness in timespreads has been modestly weaker than our expectations as demand growth has disappointed while the structural support has been stronger than expected as long-term supply problems have been much greater than expected," Goldman Sachs said. “In other words, as we have said in the past, two wrongs equal a right. On net, the two effects offset one another and we are maintaining our 2008 average WTI price forecast of $95/bbl. We continue to expect oil prices to trade above $105/bbl during the second half of this year, as a 100 thousand b/d reduction in our oil demand growth forecast was completely offset by a $5/bbl increase in our five-year forward WTI price forecast to $85/bbl.”

Goldman Sachs said that the WTI crude oil price rally of the past two weeks has seen a substantial amount of shortcovering and speculative buying, which in turn has increased the level of speculative length in the market.

"This higher level of speculative length raises the potential for another investor-led liquidation over economic concerns, particularly if the economic data weakens further," Goldman Sachs warned. “Although structurally the oil market is strong today, cyclically it remains weak, and we do not expect the cyclical fundamentals to improve until the second half of this year.”

According to Goldman Sachs the "window of opportunity for further cyclical weakening is closing because world oil demand growth is likely to begin receiving stronger support from both the United States and China in the second half of the year."