Morgan Stanley & Goldman Sachs Forecast $100-per-Barrel Oil in 2011

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February 2, 2010

By Mike Antich

The investment banks of Goldman Sachs and Morgan Stanley predict $100 per barrel or higher price for crude oil in 2011, according to a report by the Oil Price Information Service (OPIS). Goldman Sachs was the first to forecast a $100-plus-per-barrel crude oil price when the bank issued a research report last November, which called for a $110-per-barrel average price for West Texas Intermediate (WTI) crude in 2011. Morgan Stanley released a similar report in January and targets $95-per-barrel of WTI futures by December 2010, with an average price of $100 per barrel in 2011. The price of petroleum, as quoted in the news, generally refers to the spot price of WTI as traded on the New York Mercantile Exchange (NYMEX).

 "If the Morgan Stanley projection is prescient and not simply another case of 'predicting what one wants to happen,' as an analyst suggested to OPIS, it would represent a future price spike of more than $20 per barrel per day for December 2010 through December 2011 WTI futures," said Tom Kloza, director, editorial content for OPIS. It would imply wholesale price increases for gasoline and diesel will be more than 50 cents per gallon above current numbers.

Impressive Demand Growth

Morgan Stanley warns that investors should not only focus on demand from the U.S. and Organization for Economic Cooperation and Development (OECD), which includes Canada, France, Germany, Italy, Japan, the UK, and the U.S. According to Morgan Stanley, increased fuel demand will be driven by the impressive growth in China, India, Brazil, and other emerging markets.

"Global GDP growth, according to Morgan Stanley, is expected to average 4 percent in 2010 and will be led by the energy-intensive emerging economies. The bank projects global demand for oil will rise 1.7 million barrels per day this year. That rise will tighten markets, require an increase in OPEC production, and reduce world spare capacity of crude from 6.5 million barrels per day in late 2009 to 5.7 million barrels per day by late 2010," said Kloza.

For example, Morgan Stanley projects Chinese GDP will grow by 10 percent in 2010 and 8.5 percent in 2011. Since 2005, Chinese gasoline demand has increased 41 percent, despite a 122-percent increase in prices there. In 2009, China surpassed the U.S. in annual new-vehicle sales. By midyear, Morgan Stanley researchers suggest higher fuel prices may be necessary to curtail demand. The Morgan Stanley analysis states the next two years will look less like the last two and more like 2004-2008 when oil prices rose on increasing demand and flat supply.

Minimize 'Fuelish' Driving Behavior

Most observers consider it a safe guess to predict fuel prices will increase in the future. Fleets can react by modifying vehicle specifications, downsizing to smaller vehicles and engines, or by adopting hedging programs. The reality is that the overwhelming majority of factors that drive fuel prices are out of the control of fleet managers. One often overlooked option is modifying driver behavior. A large part of fleet fuel expenditures is controlled by drivers. Fleets must ensure drivers practice fuel-efficient driving habits. An ongoing driver awareness program is needed on how much excessive idling, aggressive driving behavior, and improper tire pressure affect mpg.

Driver Communication Program: Fleet managers should use e-mail newsletters to increase driver awareness of how their actions can increase or decrease fleet costs.

Avoid Unnecessary Idling: An idling engine gets zero miles per gallon. Unnecessary idling can represent a significant corporate expenditure. For instance, Verizon successfully reduced fuel costs by curbing unnecessary engine idling. Verizon estimates unnecessary idling cost the company about $20 million annually.

Maintain Proper Tire Inflation: One underinflated tire can cut fuel economy by 2 percent per pound of pressure below the proper inflation level. When a tire is underinflated by 4 to 5 psi below the manufacturer's recommended tire pressure, vehicle fuel consumption increases by 10 percent and, over time, causes a 15-percent reduction in tire tread life.

Drive the Speed Limit: Driving fast wastes gas. Traveling at 65 miles per hour uses 10-15 percent more fuel than driving at 55 mph. By adhering to speed limits, a driver will conserve fuel.

Use A/C Sparingly: An air conditioner is one of the biggest drains on engine power and fuel economy. It can reduce gas consumption by 5 to 20 percent. Don't use it as a fan to simply circulate air. Use the vent setting and fan to circulate air.

Leverage Small Savings: Small increases in mpg result in substantial savings when extrapolated across the entire fleet. A one mile-per-gallon fuel efficiency increase for a 1,000-vehicle fleet has the potential of saving over $1 million annually.

Let me know what you think.

mike.antich@bobit.com