Goldman Sachs, which in April predicted this week's major correction in oil prices, said on Friday oil could surpass recent highs by 2012 due to supply tightness.
The Wall Street bank, seen as one of the most influential in commodities business, said it did not rule out a further limited decline in oil prices in the short term.
News of Goldman's mid-term outlook on Friday prompted oil prices to pare some earlier losses.
"It is important to emphasize that even as oil prices are pulling back from their recent highs, we expect them to return to or surpass the recent highs by next year," Goldman Sachs' analysts said in a research note.
"We continue to believe that the oil supply-demand fundamentals will tighten further over the course of this year, and likely reach critically tight levels by early next year should Libyan oil supplies remain off the market," it said.
It said it believed that this week's correction in oil prices, which fell from over $125 per barrel of Brent crude to below $106 on Friday, was sparked by disappointing economic data releases and U.S. oil inventory data.
"The sell-off yesterday (May 5) has likely removed a large portion of the risk premium that we believe has been embedded in oil prices, which could suggest further downside may be limited from here."
"However, we remain wary of potential further downside should economic data releases in coming days continue to disappoint, with the focus now turning to today's (May 6) non-farm payroll report in the United States."
Good Buying Opportunity?
Goldman rocked markets in April by calling a nearly $20 fall in Brent, saying speculators had pushed prices ahead of fundamentals.
Goldman was one of the first banks to predict $100 oil last decade, in 2005 when prices were closer to $50 a barrel, but it stayed bullish for some time after oil peaked at $147 in 2008.
"In terms of timing, Goldman got it (the crash) right this time. Well done," said an oil trader with a major rival bank.
"It (this week's fall) was a move driven by macro funds after U.S. and German data disappointed and (European Central Bank President Jean-Claude) Trichet did not deliver on yet another rate rise," he said.
"With Asian funds having liquidated some of their position today I think we will now see prices stabilizing and even if U.S. jobs data is poor this afternoon, I don't think it will turn as horrible as yesterday," he added.
Another major commodities player among banks, Barclays Capital, which also predicted prices could correct but not as steeply as Goldman, said on Friday the current levels already represented a good buying opportunity.
"While further downside from potential weaker macro releases cannot be ruled out, the general trend from here should be higher, rather than lower, in our view," said Amrita Sen.
She added that worries about tight supplies and unrest in the Middle East will outweigh concerns about U.S. gasoline demand destruction or slower Asian demand due to inflation.
Colin O'Shea, head of commodities at Hermes, who helps manage over $2 billion, also said the correction was a good opportunity for investors to get into the market if they missed out on the previous rally.
"Fundamentally, in the energy space and in crude oil, not a lot has actually changed. We have got diminishing spare capacity, globally demand is picking up, we have got some supply-side issues — so the factors that caused the price rises right throughout 2010 are still there," he said.
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