12 February 2015 – The slump in oil prices may not be over, according to Goldman Sachs Group Inc.
The decline in the number of U.S. drilling rigs that’s helped crude futures in New York rebound 14 percent from this year’s low isn’t enough to reduce an oversupply, the U.S. bank said in a note dated Feb. 10. Lower prices are needed for American output to slow sufficiently to rebalance global markets, it said.
Goldman joins Citigroup Inc. and Vitol Group, the world’s biggest independent oil trader, in signaling prices may resume a decline amid unrelenting production growth. West Texas Intermediate crude is still down by half from last year’s peak as the U.S. pumps the most in three decades. While companies have idled rigs and cut spending, it will be some time before production is affected, according to the International Energy Agency.
“The decline in the U.S. rig count likely remains well short of the level required to slow U.S. shale oil production to levels consistent with a balanced global market,” analysts including Damien Courvalin wrote in the report. “Lower oil prices will be required over the coming quarters to see the required U.S. production growth slowdown materialize.”
U.S. drillers cut rigs targeting oil by a record 435 to 1,140 in the nine weeks to Feb. 6, according to Baker Hughes Inc. That’s the lowest total since December 2011 as explorers slow efforts in the Permian Basin in Texas and North Dakota’s Bakken formation.
U.S. production will increase by 7.8 percent to 9.3 million barrels a day this year, the fastest pace since 1972, the Energy Information Administration said in its monthly report on Tuesday. That’s down 10,000 barrels a day from its January projection.
Goldman still forecasts “strong production growth” by the fourth quarter of 2015 amid increasing productivity at wells and rigs. The closing of the least-efficient output first also means more drilling has to stop to temper the increase in supplies, it said.
The bank cited producers as saying most of the decline has been for non-contracted rigs and they plan to renegotiate rates lower, meaning there’s potential for a rebound in activity. What’s more, the recent rally in prices has given them an opportunity to hedge against further losses, potentially reducing the need to slow output.
“A slower slowdown in U.S. shale oil production would leave risk to our price forecast skewed to the downside, as it increases the risk of running out of crude oil storage capacity, requiring a decline to shutdown economics,” the analysts wrote.
Goldman last month cut its six- and 12-month forecasts for Brent to $43 and $70 a barrel respectively, from $85 and $90, amid increasing inventories. It also reduced its projections for U.S. benchmark West Texas Intermediate to $39 a barrel and $65, according to a Jan. 11 report.
Vitol Group’s Chief Executive Officer Ian Taylor said in London on Tuesday that “another move down” is possible before the market rebalances in the second half. Unrelenting U.S. crude production will lead to “dramatic” increases in inventories for several months, he said.
Prices may slump as low as $20 a barrel and remain there “for a while,” as U.S. supplies are joined by record output from Russia and Brazil, Ed Morse, Citigroup’s head of commodities research, said in a report e-mailed on Feb. 9.
WTI crude was at $49.86 a barrel on the New York Mercantile Exchange at 12:14 p.m. London time. The price dropped as low as $43.58 on Jan. 29, down from last year’s peak of $107.73. Brent futures, an international benchmark, fell 1.1 percent to $55.80 on the London-based ICE Futures Europe exchange.
*Ann Koh, [email protected] – Bloomberg