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Oil Set to Rise ‘Substantially’ by 2012, Goldman Says

Oil prices will be “substantially higher” by 2012 as the global stockpile surplus shrinks and excess production capacity drops, according to Goldman Sachs Group Inc., the most profitable bank in Wall Street history.

Global economic growth will drive oil demand and reduce inventories, which are still “exceptionally high” in developed countries including the U.S., the world’s biggest user of crude, Goldman said in a report dated yesterday. Spare capacity held by the Organization of Petroleum Exporting Countries will decline as the 12-member group, which pumps 40 percent of the world’s oil, boosts supply to meet demand, the bank said.

“Despite the recent rally, we believe that forward price levels offer good hedging opportunities,” Goldman analysts, led by Allison Nathan in New York, said in the report. “We continue to expect improving fundamentals will provide additional support to prices.”

Oil climbed to the highest in two years yesterday, and is up 7 percent this month, on speculation the Federal Reserve’s stimulus program will weaken the dollar, bolstering the investment appeal of commodities. U.S. crude inventories plunged 7.4 million barrels last week, the biggest drop since September 2008, according to an American Petroleum Institute report yesterday.

The Fed said Nov. 3 it will buy an additional $600 billion of Treasuries through June to spur the economy. Investors should have an “overweight allocation” on commodities because this policy, along with the global recovery, is positive for prices, according to Goldman.

‘Price Appreciation’

“We continue to expect strong price appreciation for key commodities and thus substantial aggregate commodity returns,” the report said. “We continue to see differentiation across commodity fundamentals and ultimately, relative performance.”

Commodities have extended a rally to a 25-month high as the global appetite for crops outpaced supplies and as precious metals surged on demand for a haven from declining currencies.

The Thomson Reuters/Jefferies CRB Index of 19 raw materials rose as much as 1.6 percent to 320.38, the highest level since Oct. 6, 2008. The gauge has jumped 21 percent since Aug. 31, led by cotton, sugar and silver.

Crude, along with copper, zinc, gold, platinum and corn, will have the “most upside potential” in the next 12 months after the U.S. economic-stimulus measures, according to Goldman Sachs.

Chicago Corn

The bank, which last week recommended investors sell the February 2011 aluminum contract, maintained its calls to buy New York platinum futures for January 2011 and copper and gold contracts for December 2011. Buyers should also purchase Chicago corn contracts for March 2011, it said.

Goldman’s call to buy December 2010 New York oil futures, recommended on Feb. 5, has achieved a profit of $9.31 a barrel so far, according to the report. The contract was at $86.81 a barrel, up 9 cents, in electronic trading on the New York Mercantile Exchange at 9:47 a.m. Singapore time today.

U.S. crude stockpiles reached 368.2 million barrels at the end of October, 14 percent above the five-year average level, according to the Energy Department.

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