Why I Won’t Pay A Penny Over $70 For Oil

For the third consecutive month, The International Energy Agency (IEA) released an upward revision of its forecast for world oil demand. It juiced up August’s estimate by 500,000 barrels a day, citing better-than-expected economic growth in developing Asian economies and North America.

So this rejuvenated demand for oil will have a barrel trading north of $90 in the weeks ahead, right? (The current market price for a barrel of oil is about $72.)

Not so fast. Two factors will likely hold price down through the end of the year.

Factor #1: When the financial crisis hit, and oil demand waned, suppliers began storing the massive inventory excess on tankers. OPEC said that, “Some 60 million barrels of products, mainly middle distillates, are being held in floating storage, largely off Europe.” As our research indicates, we’ve still got plenty to burn through.

Factor #2: The number of active oil rigs was cut by nearly half in the wake of Wall Street’s meltdown. But given the recent increase in demand, the global rig count - although modestly - is ticking upward again. Which means more oil will be coming out of the ground.

On news of the IEA’s revised forecast, Goldman Sachs (GS) said that it expects oil prices to reach $85 a barrel by the end of the year.

For the record, I’m a longer-term oil bull. But in the short term, Goldman is misreading the market.

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