Goldman Sachs, which in April predicted this week's major correction in oil prices, said on Friday that oil could surpass its recent highs by 2012 as global oil supplies continue to tighten.
The Wall Street bank, seen as one of the most influential in commodity markets, said it did not rule out a further short-term fall after Thursday's near record drop, especially if economic data continued to disappoint.
But the bank reaffirmed its traditional long-term bullish view of oil, helping crude to pare some of its earlier heavy losses on Friday. And it wasn't alone: JP Morgan took the bold step of raising its oil price forecasts for this year by $10, becoming the most bullish of 27 forecasts in a Reuters poll.
While financial bushfires or perhaps a rapid resolution to the Libyan civil war could radically alter market dynamics, the balance of both risks and fundamentals still points to a supply-constrained world, JP Morgan analysts, including Lawrence Eagles said in a note late on Friday. They said oil would rise to $130 in the third quarter to check demand.
Goldman, meanwhile, stuck largely to the same view it first aired three weeks ago -- a medium-term correction followed by a renewed ascent.
It is important to emphasize that even as oil prices are pulling back from their recent highs, we expect them to return to or surpass the recent highs by next year, Goldman Sachs' analysts said in a research note.
We continue to believe that the oil supply-demand fundamentals will tighten further over the course of this year, and likely reach critically tight levels by early next year should Libyan oil supplies remain off the market, it said.
Oil prices remained extremely volatile on Friday, roiled by better than expected U.S. jobs data, which eased fears about global economic recovery that contributed to a 10-percent price crash on Thursday.
Goldman said it believed this week's correction in oil prices, which fell from above $125 per barrel of Brent crude to below $106 on Friday, was sparked by disappointing economic data releases and U.S. oil inventory data.
The sell-off yesterday (May 5) has likely removed a large portion of the risk premium that we believe has been embedded in oil prices, which could suggest further downside may be limited from here.
At 12:30 p.m. EDT (1630 GMT), Brent crude oil was up $1.05 at $111.85 a barrel, having earlier hit a 2-1/2 month low of $105.15. U.S. crude was down 5 cents at $99.75 a barrel, having earlier dropped to $94.63 a barrel.
Goldman rocked markets in April by calling a nearly $20 fall in Brent, saying speculators had pushed prices ahead of fundamentals.
Goldman was one of the first banks to predict $100 oil last decade, in 2005 when prices were closer to $50 a barrel, but it stayed bullish for some time after oil peaked at $147 in 2008.
In terms of timing, Goldman got it (the crash) right this time. Well done, said an oil trader with a major rival bank.
It (this week's fall) was a move driven by macro funds after U.S. and German data disappointed and (European Central Bank President Jean-Claude) Trichet did not deliver on yet another rate rise, he said.
With Asian funds having liquidated some of their position today I think we will now see prices stabilizing he added.
JP Morgan, which last raised its forecasts in late March, is now predicting $120 a barrel for Brent in both 2011 and 2012. It has averaged about $110 a barrel so far this year, but fell by a record more than $16 this week, closing below $110 a barrel for only the second time since Libyan exports were cut.
GOOD BUYING OPPORTUNITY?
Goldman's short-term view was rejected by many of its banking rivals back in April, with both Barclays Capital and Morgan Stanley arguing there was little evidence higher prices were causing demand destruction in the United States, the world's largest oil consumer.
Barclays Capital and Deutsche Bank said on Friday the current levels might be a good buying opportunity.
While further downside from potential weaker macro releases cannot be ruled out, the general trend from here should be higher, rather than lower, in our view, said Amrita Sen, an oil analyst at Barclays.
She added that worries about tight supplies and unrest in the Middle East will outweigh concerns about U.S. gasoline demand destruction or slower Asian demand due to inflation.
Deutsche Bank commented: We believe composure will return to commodity markets as underlying fundamentals remain bullish in our view... We believe the collapse in oil prices this week is more a positioning event than a change underlying fundamentals.
Andrew Moorfield, the head of oil division at Lloyds, said he saw oil at around $110 in 2011 and $100-$110 going forward.
Despite this week, the demand curve for oil remains with an upward trajectory... Globally, this general fall in commodities prices will reduce the drag many were starting to think they were having on economic growth.
Colin O'Shea, head of commodities at Hermes, who helps manage over $2 billion, also said the correction was a good opportunity for investors to get into the market if they missed out on the previous rally.
Fundamentally, in the energy space and in crude oil, not a lot has actually changed. We have got diminishing spare capacity, globally demand is picking up, we have got some supply-side issues -- so the factors that caused the price rises right throughout 2010 are still there, he said.
(Reporting by Dmitry Zhdannikov, additional reporting by Claire Milhench and Ratul Ray Chaudhuri in Bangalore, editing by Anthony Barker, Alden Bentley and Sofina Mirza-Reid)