Crude Bull Run May Be A Long Ride With Capital Constraints

WASHINGTON (Dow Jones)–As oil prices threaten to spike above $110 a barrel Tuesday – daily setting new inflation-adjusted records – some industry experts say the bull run is in for a long ride and crude could surge even higher.

While in the short term, traders are concerned about inventory levels heading into the summer, Jeffrey Currie, chief strategist and managing director of global investment for Goldman Sachs (GS), says bottlenecks in global capital investment flows into new oil production will likely continue to put upward pressure on oil prices in the mid to long term.

The investment bank last week upped its crude price forecasts – tacking $15 a barrel to all of its oil estimates – expecting an average of $95 a barrel for 2008, $105 for 2009 and $110 for 2010. The bank said under some scenarios, including major supply disruptions, prices could lead to $150-$200 a barrel.

Despite a possible recession looming on the horizon that could curb global demand, a razor-thin capacity cushion, a raft of supply disruption threats and a weakening dollar have helped to buoy oil to their current levels. Last week, the Organization of Petroleum Exporting Countries decided to hold production steady, expecting global inventory levels to climb.

Currie, speaking at an oil conference here, said capital controls, such as Mexico’s barring of foreign investment in the energy industry, was one of the major constraints to growth. “You have capital controls in all the major producing regions of the world at this point, and if you don’t have capital controls, in some cases you have outright nationalization,” he said.

“The commodities themselves flow freely across the world, the capital that goes into the productive capacity does not,” he added.

That investment barrier is forcing international oil companies to invest in high-cost environments such as the tar-sands of Canada – long considered uneconomic until prices rose above $65 a barrel – or Brazil’s and the U.S. Gulf of Mexico’s major deepwater prospects, which require major, multi-billion dollar infrastructure developments.

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