You may find it hard to believe that just three years ago Deutsche Bank analysts were forecasting a 2010 oil price of $24 a barrel. They were living in cloud cuckoo land.
The spike in oil prices that were way ahead of analysts' forecasts ensured that the oil majors consistently beat expectations in their quarterly results for years. This lead to a rerating of the sector - and a nice stream of profits for investors. I believe the same thing is about to happen again.
Let's take the example of Deutsche Bank. So, after wracking their brains very vigorously, three years ago analysts at Deutsche decided that $24 a barrel was too low and raised their estimate to $27 a barrel then in February 2005 Deutsche raised its forecast to $32 a barrel then to $35 in July 2005 and to $40 in September 2005. It stayed at that level until June 2006, when the analysts upped their forecasts to a whopping $45 a barrel
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This was all so out of synch with reality that clued-in investors sat on an integrated oil gravy train as the sector consistently outperformed analysts' expectations. Not surprising really. However, I believe that analysts' consensus forecasts are still too low and the opportunity has arisen yet again to grab some integrated oil gravy.
Oil futures set another record high yesterday as this afternoon's US oil inventory data looks set to show another fall. But I believe that this is just this first of many tests of new highs.
The prospect of $100 dollars a barrel oil is very real - and the downside to the oil price is limited indeed. I think oil will hit $100 a barrel at the start of next year possibly sooner if a major news event intervenes. This is a licence for oil majors to print money and you should grab some of that too.
One of the wiser sector analysts works for Goldman Sachs. His name is Arjun Murti. In March 2005 he said that oil prices could touch $105 a barrel during a 'super spike' period because demand was stronger than anticipated. No-one believed him.
However, at the end of last year, he revised this view. (Remember, Murti is one of a few voices in the industry seriously predicting these soaring prices). In December 2006 he said that his $105 a barrel estimate may be conservative if the peak oil theory is right and world supplies are running out.
He said that: "The belief that the world's oil supply is close to an irreversible drop is no longer on the fringes of the market
This was at the same time as Saudi Arabian Oil Minister Ali al-Naimi and Exxon Mobil president Rex Tillerson were predicting oil supplies will last for decades. But, they would say that, wouldn't they?
A couple of weeks ago, Merrill Lynch upped its 2007 WTI oil price forecast by 38% to $65 a barrel. Remember, these forecast are used by all the other analysts across the company in their own forecasting models. Deutsche Bank is now forecasting 2010 oil at $60 a barrel.
History is repeating itself. I believe the oil price will hit $100 a barrel in the next year or so and the oil majors will be smashing consensus expectations again. I have seen this cycle before and I see it happening again.
If you don't have an oil major in your portfolio, then now is the time to get one in there. It looks like a no-brainer from where I am sitting.
By Garry White for his Garry Writes' newsletter. To find out more about his monthly newsletter, Outstanding Investments, which expands on his views and makes specific recommendations in the resource, infrastructure and biotech sectors, click here: Outstanding Investments
Investing in shares can lose you some or all of your investment. Never risk more than you can afford to lose. Small company shares can be illiquid and carry higher risk than other shares. Past performance is no guide to the future. Consult a financial advisor if unsure. Fleet Street Publications Ltd. 020 7633 3600
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