June 4 (Bloomberg) -- Goldman Sachs Group Inc. raised its forecast for U.S. benchmark oil by 31 percent to $85 a barrel for the end of 2009 and predicted further gains next year as demand recovers and supplies shrink.

“As the financial crisis eases, an energy shortage lies ahead,” Goldman analysts Jeffrey Currie in London and David Greely in New York said in a report e-mailed today. The bank set a 12-month price target of $90 a barrel for West Texas Intermediate crude, up from $70, and introduced a forecast of $95 for the end of 2010.

Oil posted its biggest monthly gain in a decade in May, and this month traded above $69 a barrel for the first time since November on speculation a global economic recovery will trigger a rebound in demand. A decline in the value of the dollar has also drawn investors to crude and other commodities as an inflation hedge.

The rally has been driven by the “unwinding of pricing dislocations caused by the credit crisis,” Goldman said in the report dated June 3. It’s a “prologue” to a price recovery in the second half of the year as the global economy stabilizes and crude inventories decline, the bank said.

Crude oil for July delivery traded at $66.87 a barrel on the New York Mercantile Exchange as of 9:05 a.m. London time. Goldman had expected oil to dip during the middle of this year, then rally in later months.

Risks Reduced

“With the risk of further pricing dislocations reduced, we are omitting the prior anticipated price pullback from our forecasts and have raised our 3-month ahead price target to $75 a barrel from $52 a barrel,” Goldman said.

Easing credit markets have cut financing costs on crude storage, strengthening near-term prices relative to longer-term contracts, or narrowing the so-called contango, according to Goldman. The contango is likely to continue shrinking this year as production cuts by the Organization of Petroleum Exporting Countries reduce crude inventories, the bank said.

“The key to the anticipated recovery in supply-demand fundamentals will be the willingness of OPEC, in particular Saudi Arabia, to keep production reduced and draw inventories back to 10-year average levels,” according to the report.

Closed Selling

Goldman closed its trading recommendation to sell WTI July crude futures on Nymex, which was put in place on April 17 when the contract cost $54.66. The trade lost $11.56 a barrel, according to the report.

The bank recommends buying crude options for the right to buy oil at $85 by June 2010, while selling a contract for the right to buy at $100 a barrel in the same period.

Goldman, the fifth-largest bank in the U.S. by assets, said it expects there to be an energy shortfall by the second half of next year as spare production capacity among OPEC members is unable to meet rising demand as non-OPEC supplies wane.

“Even a full return of spare OPEC production will be insufficient to avoid a sharp decline in inventories as non-OPEC production continues to decline amidst rising demand,” Goldman said in the report.

Non-OPEC supply may shrink by 400,000 barrels a day in 2009 and by 910,000 barrels a day in 2010, Goldman said. The International Energy Agency expects a contraction of 300,000 barrels a day this year.

Goldman’s New York-based energy equities research team, led by analyst Arjun Murti in March 2005 correctly predicted a “super spike” in prices. In May last year, Murti said oil may rise to between $150 and $200 a barrel within two years. The team revised its forecast after prices then slumped from a record $147.27 in July.

To contact the reporters on this story: Stephen Voss in London at sev@bloomberg.net Alexander Kwiatkowski in London at akwiatkowsk2@bloomberg.net

Last Updated: June 4, 2009 10:09 EDT