Goldman Sachs predicts oil prices to settle at $42 per barrel

Blue oil barrels, stacked
Source: DollarPhotoClub

As oil prices reach new lows, with the price of benchmark Brent at $47.43 a barrel, the lowest since early 2009, and the North Sea benchmark dropping on Monday to 47.36 dollars a barrel, analysts at Goldman Sachs predict that oil prices can slip as low at $42 per barrel in the first half of 2015.

The reasons for the slide are complex but include the overproduction from American shale fields and the unwillingness of OPEC countries to curb production to shore up the prices; a move that is widely interpreted as an attempt to put financial pressure on shale producers.

In response to the decline in prices shale investment has declined in the last six months, but Goldman believes that more time is needed to affect the supply and lower the prices.

“To keep all capital side-lined and curtail investment in shale until the market has rebalanced, we believe prices need to stay lower for longer,” the analysts said, halving their previous $80-a-barrel forecast.

Not everybody agrees, though.

For one, OPEC does not speak in a unanimous voice. While Saudi Arabia is willing (and able) to keep the production even at low prices, other members – like Venezuela – depend too much on oil profits to balance its social spending to be comfortable with the rock-bottom prices. There are signs that attitudes within OPEC are beginning to shift. Over the weekend Venezuela said in a statement that it had agreed with Saudi Arabia to work for a recovery in the oil market and oil prices “with state policies” from the two countries.

Other analysts who disagree with Goldman’s predictions include Charles Whall, a portfolio manager at Investec Asset Management. In an interview with BizNews.com, he pointed out that production from unconventional wells can react to the market much quicker than conventional projects.

“We’re seeing an eight percent reduction, just over the last month. So there’s no better metric and you’ve got to remember that with the unconventional production, with the shale production, it’s a capital intensive and immediate production effect. So, these wells are drilled within and brought on, within one month, and then we see production come on at 1000 barrels a day for a well but it falls within the first six months, to well below 500 barrels per day. So you have this rapid decline coming on.

“We also, what Goldman is omitting is that this year is a particularly poor year for new development. This is why the oil service companies have been suffering for a while because we have very little new production coming on.”

“In fact, a million barrels per day less new production this year, than we saw in 2014. That’s a dramatic reduction and we don’t think that’s in their numbers,” he concluded.

As a result, Mr Whall expects that by the end of February 2015 there will be a sufficient fall in rig count to stop the decline in oil prices. He also anticipates that if the prices don’t rebound by the summer, OPEC – at its next meeting scheduled for June – will step in faster than current indicators.

Goldman Sachs has been known to have made some very poor predictions when it comes to energy prices in the past.

In the spring of 2008 they forecast that prices could rise from $123 to as much as $200 a barrel within two years thanks to strong demand from booming emerging market economies. In fact, the oil price collapsed shortly afterwards, as the global financial crisis took hold, bottoming out at $45 later that year.

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