A new report from Goldman Sachs Commodities Research suggests that crude oil prices still have more room on the downside. The report, published October 26, argues that non-OPEC production will continue to grow slightly faster than demand for the next few quarters, so oil prices are likely to stay well below $80 a barrel until 2016. That is bad news for the countries in the chart below, especially Libya, which Goldman calculates needs $185 crude oil to breakeven.
GS analyst Damien Courvalin and colleagues note: “We now forecast that prices will need to decline further in 2015 as (1) accelerating non-OPEC production growth outside North America will outpace demand growth, leaving the oil market oversupplied, (2) the scale and sustainability of US shale oil production is driving the global cost curve lower and sustaining cost deflation, and (3) OPEC will no longer act as the first-mover swing producer and that US shale oil output will be called upon to fill this role.”
Crude oil prices back up to $80 per barrel in 2016
The Goldman report points out, however, that this dip in crude oil prices is only likely to last for a year or so, and prices should start to work their way back up as demand catches up to supply. Courvalin et al. note that they expect stabilizing fundamentals with some cuts to OPEC production once a slowdown in U.S. production growth is clear cut. The GS analysts also highlight their longer-term oil price forecast. “Our 2016 and long-term forecasts are now $80/bbl WTI, $90/bbl Brent. Uncertainty around the required price to slow down US shale production growth is a key risk to our price forecast.”
Shale production sets oil price today, not OPEC
Courvalin and colleagues also note that a strong global crude oil market had required near-capacity OPEC production and U.S. shale production growth. However, the rapid growth of shale production made it obvious that a return to surplus was only a matter of time (US shale oil production is now growing by Libya’s total capacity every year).
The analysts say they now have a “higher confidence that a structural transition has been reached and that US production growth needs to slow.” Therefore, their forecast also takes into account a loss of pricing power by core-OPEC.
They note: “Consistent with the economics of the “dominant firm/competitive fringe” market structure and shale production exceeding OPEC spare capacity, pricing dynamics in the oil market have moved away from the dominant firm’s production decision and towards the marginal cost of US shale oil production.”