Goldman Sachs On The 'New Oil Order'

Goldman Sachs analysts Jeffrey Currie and Damien Courvalin issued a report on the "new oil order" Monday and forecasted that prices will remain low.

The analysts noted that “supply rises more quickly than it falls in response to investment. As a result, the short-cycle nature of capital investments in shale requires that such pressure remain in place long enough to keep capital sidelined while the market rebalances, creating a more U-shaped type of recovery in prices.”

The analysts concluded that to “keep all capital sidelined and curtail investment in shale until the market has rebalanced, prices need to stay lower for longer.”

“As short cycle shale producers typically hedge out 9-12 months, E&P capital primarily focuses on the 12 to 24 month strip in making investment decisions. As a result, the market anchor is shifting to this ‘one-year-ahead’ swap which creates the level of investment to balance future physical markets. It is therefore this forward price that needs to remain below full-cycle costs to curtail investment, not the spot price.”

Currie lowered estimates for marginal cost to $65/bbl and $70/bbl for WTI and Brent from $80/bbl and $90/bbl respectively due to “significant cost deflation and efficiency gains.”

“These are our new ‘normal’ price forecasts. As a result, we forecast that the one-year-ahead swap needs to remain below the $65/bbl marginal cost, near $55/bbl for the next year to sideline capital and keep investment low enough to create a physical rebalancing of the market,” according to Currie.

The analysts felt that a “new industry will be born out of this environment with lower costs driven not only by cost deflation in other commodities, currencies, rig rates and oil services but also by substantial productivity gains created by engineers facing tighter margins.”


The result of the industry shift and capital rebalancing will include “the need to match high-quality assets with more conservative capital structure and to discard high-cost deepwater and oil sands assets and other alternative technologies to make the industry more efficient," which the analysts felt was unlikely to occur for at least a year.

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