Are oil prices headed for a 'super spike'?
By Andy Serwer

(FORTUNE Magazine) – THE NEWS SPREAD INSTANTLY ACROSS Wall Street trading desks on a Thursday morning at the end of March: "Some analyst at Goldman Sachs says oil is going to $105 a barrel! He's calling it a 'super spike'!" Within minutes the price of oil was surging--a day later it would hit a new high of $58 a barrel. Angry investors lashed out at Goldman, calling the report preposterous and accusing the firm of manipulating the market to benefit its energy-trading desk. There were calls for a government investigation. The host of one cable TV business show wondered whether the guy who made the call had "some type of insidious background." A week later, at the firm's annual shareholders' meeting, Goldman Sachs CEO Hank Paulson felt compelled to defend the report and the integrity of the analyst and his firm. Whew! Such is the nature of the oil markets these days.

So just who is this super-spike man, and what in the world was he thinking? Well, his name is Arjun Murti, and he's a veteran oil analyst and a managing director at Goldman. Press-shy by nature anyway, the poor guy was so unsettled by the reaction to his report that he refused all interview requests--until, that is, I was able to persuade him to take my call. He declined to have his photograph taken for this story.

Some will say that Murti should have realized that his prediction would cause outrage. Not necessarily. First of all, Murti's report is a thoughtful, 30-page piece of logical analysis that was grossly oversimplified by most of the media. (Al Jazeera ran one of the more reasonable reaction stories.) Second, Murti had previously raised the notion of a super spike in two reports last year--in June and September--forecasting a then sensational peak price of $80 a barrel. Last, the theory circulating that he wrote the report to benefit Goldman's trading desk is idiotic. (If or when Goldman pulls a lever to jack one of its trading positions, let's face it, you wouldn't know about it!)

The crux of Murti's theory is simple: We're in the middle of a classic boom-and-bust cycle. The economy has been heating up here and in China, which pushes up the cost of crude. When the price of oil--and especially, here in the U.S., of gasoline--climbs too high, it curbs economic activity, which then depresses the demand for oil, causing prices to drop. Nothing revolutionary there. For now, though, demand for crude is continuing to rise--if a little more slowly than last year. That means prices could go higher. Remember: In terms of 2005 dollars, oil peaked in 1980 at $85 a barrel.

But isn't all this talk about a super spike a little hysterical? "All I did was to raise the high end of my price band from $80 a barrel to $105 a barrel," says Murti. "Spending on gasoline in the U.S. relative to the overall economy is still well below where it was in 1980--81. So demand could still climb from here." To get to his peak price of $105 a barrel, Murti says, there would probably have to be a disruption in supply, as from some major terrorist action. "Most investors are only familiar with oil cycles in the 1990s, when the price modulated gradually and moderately," Murti says. "The current environment is more like the 1970s." That may not sound like great news for consumers or business, but remember that the '70s weren't a bad time to own oil stocks. Which is the point of Murti's report in the first place. He's an oil analyst. Recommending oil stocks is his primary charge. (Exxon, Amerada Hess, and Murphy Oil are three of his picks; for some unconventional oil plays, see Investing.) His mistake may have been broadcasting that the price of a barrel of oil could soon resemble an NBA score. Investors who cry foul might be making a mistake by tuning him out. ■