Goldman Holds Firm On $149 Oil By End of Year, What This Means For Rates

Despite short-term predictions for sub-$100 oil, Goldman Sachs is sticking by a call they made earlier this year for $149 oil by the end of the year, citing Chinese demand as a key driver of prices. Below are excerpts from a CNBC report:

Chinese oil import data for August are expected to be weak as the country relied on existing inventories during the Olympic Games, but this is likely to change, the [Goldman] analysts said. “We continue to expect that strong Chinese buying will return to the market as China restocks after the Games,” Goldman Sachs wrote. “For oil we continue to believe this will require (West Texas intermediate) crude oil prices to move back to $149/barrel by year end.”

Despite a negative reading for the Chinese Purchasing Manager’s index (PMI) — indicating contraction in the manufacturing sector — for the second month in a row, other indicators, such as retail sales and fixed assets investment, stayed robust. Cumulative loss of supply from shutdown of pipelines because of Hurricane Gustav, the explosion of the BTC pipeline in Turkey and the shutdown of an oilfield in Angola was almost 40 million barrels, Goldman Sachs analysts wrote.

The current dip in oil has been followed by rallies in mortgage (and other) bonds, because bonds are betting on a decrease in inflation as oil prices come down. This is certainly good for rates, but in the context of oil spiking again, it could mean a temporary dip in rates. Consumers should be aware of this and plan their rate lock strategy accordingly.