Brent crude futures are currently trading around $110 per barrel, implying 36 percent upside from here.
Hans Bentzien at Dow Jones has the scoop:
Mr. Currie pointed out that despite the boom in U.S. shale gas, the oil price remains high, which he attributed primarily to sanction-related supply disruptions in Iran.
Trying to compensate for this, Saudi Arabia has already increased its oil production to a 30-year high this year.
At the same time, Mr. Currie added that while global oil demand has increased at a slower pace, it is still higher than the production increases in non-OPEC countries.
In a not to clients published Sunday, Currie wrote:
We are not out of the woods yet
Despite the recent price stability, we believe that this decline in commodity volatility is too much too soon, dropping far below the volatility of other asset classes, as risks to both the downside and upside have not completely gone away (see Exhibits 2 and 3). In other words, we are not out of the woods yet. Upside risks for oil prices include low inventory levels, limited OPEC spare capacity, and geopolitical risks which are likely near an all-time high with production in a very large number of countries at risk, including Egypt, Iran, Iraq, Libya, Nigeria, Sudan, Syria and Venezuela. In addition, the price stability in 2H2012 was achieved during a period of extremely weak global demand growth and a decelerating China, all of which are expected to improve during the latter half of this year.
While one can argue that the upside in oil is capped by a combination of weaker economic growth and the US SPR, a stronger economy later this year would likely raise the threshold for prices while the recent surge in US oil production which has displaced US imports somewhat reduces the impact the US SPR would have on global markets. Downside risk for all commodity prices comes from the fact that the macro-economic and policy improvements are still fragile. Europe still faces economic and policy headwinds, China just experienced a significant food inflation surprise (and the livestock impacts from last year’s agriculture price spike will only be felt this year) and the US still faces risks from the debt ceiling debate, the automatic spending cuts (or “sequestration”) and impending tax increases. On net, while we have sympathy for the view of a structural decline in long-term commodity price volatility, we believe the recent decline is too much too soon, both relative to commodity market fundamentals as well as other asset classes.
Bentzien also notes that Currie's call today stands in stark contrast to Goldman's base case for 2013, which expects Brent crude to fall to $100 per barrel.