Goldman Sachs Head Of Commodities Research Explains Why He Cut His Forecast For Oil

Crude took a big hot on Monday, making a low of $45.88, following Goldman Sachs Group Inc GS cutting its short-term price forecasts and no signs of a decline in supply from Gulf countries.

Jeff Currie, head of commodities research at Goldman Sachs, was on CNBC Monday to discuss why he cut his forecast for Crude.

“I think the key theme here is keeping capital out of the market and prices have to remain low enough to keep potential capital, there’s a lot of pooled capital out there, private equity, international oils,” Currie said. “The idea is that capital is the new margin of adjustment, another way to say it; this market is experiencing a paradigm shift right now. It really was driving that paradigm shift is one simple observation; shale is fast-cycle production, which means you put capital in today, you can get production 30 or 60 days from now.”

He continued, “That’s radically different from the World we are used to live in which you made investments today, you wouldn’t get production for three or four years.The second factor that is driving this is there is very high decline rate of Shale. So, it means when you quit spending, production starts to fall. So, it has now turned oil into something like paper clips…and now it gives the market three different components or leverage to pull to adjust supply – credit, equity as well as cash-flow.”

At What Prices Can Defaults And Bankruptcies Take Place?

“We estimate that when you get into the bottom quartile of companies, once you get down to $40 a barrel on WTI basis, if you stay there for six months, you start to create real default probabilities,” Currie replied.