While oil prices have had V-shaped recoveries in the past, caused by a lack of physical storage, tight freight markets, and strong balance sheets, a January 11 Goldman Sachs report argues that even with capex already falling sharply, changing industry conditions mean oil prices will have to stay depressed longer before there is enough of a reaction to push prices back up.

“We believe this bear market will likely be characterized by more of a U-shaped recovery in which markets take longer to recover and will likely rebound to far lower price levels from where they sold off from,” write Goldman Sachs analysts Jeffrey Currie, Damien Courvalin, Anamaria Pieschacon, and Michael Hinds. “The current industry has far greater storage and tanker capacity and a more aggressive capital structure than it had in the more recent past which diminishes the physical market’s role and increases the capital market’s role.”

To account for these changes, Goldman Sachs is reducing its oil spot and future price forecasts, and predicting a tighter spread between WTI and Brent crude, though does expect the spread to open back up over the next year. Although Goldman (and nearly everyone else) missed the 50% drop in oil prices, Goldman is predicting that the commodity could go as low as $40 a barrel.

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Investments based on forward oil prices, not spot: Goldman Sachs

There’s no question that capex spending has already been slashed at a remarkable rate, but the Goldman Sachs report says that there is still enough production coming online to keep prices low. Part of the reason for this is that shale has a short production cycle, so producers hedge nine to twelve months out and capital markets are looking 12 to 24 months ahead when making investment decisions. So even if spot prices are below full cycle production costs, while oil is in contango (forward prices are higher than spot prices) capex won’t fall as low as you might expect.

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Between tank farms, refineries, and tankers there’s also just a lot more excess storage capacity this time around than there was in previous oil bear markets, so oil prices can remain in contango for longer. When storage capacity dwindles that could put more pressure on oil futures, which would push capex even lower, but the whole sequence of events could take a while to play out.

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Debt servicing concerns puts the floor around $40: Goldman Sachs

The Goldman Sachs report says that, in theory, debt servicing concerns should set the floor at $40 per barrel, but that the more strongly people believe we will have a V-shaped recovery, or that the price recovery is right around the corner, the lower prices will have to fall to get a big response.

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