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Evan Kelly

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$50 Oil For 15 Years – Can Anyone Take Goldman Seriously Anymore?

The Federal Reserve decided to leave interest rates unchanged, a move that had become increasingly expected as the Fed meeting drew closer, due to low inflation and concerns over instability in global financial and currency markets. Federal Reserve Chairwoman Janet Yellen said that “heightened uncertainties abroad” convinced the board to wait before raising interest rates. A rate hike is still likely before the end of the year, but probably no more than 0.25 percent. The Fed cited strong consumer demand, solid job gains, declining unemployment – all reasons that a rate increase is likely sometime soon. When that increase does occur, it will be the first increase in almost a decade. Crude oil prices barely budged on the news, trading slightly down.

Meanwhile, Goldman Sachs continues to roll out bearish predictions for oil prices. The latest from the investment bank is that oil prices could remain low for 15 years. Goldman made headlines recently when it outlined a scenario in which oil prices would drop to $20 per barrel. Now the bank is outdoing itself with a prediction that oil will remain around $50 per barrel though 2030. For evidence, it points to the bust of the 1980s when oil prices did not rebound until the turn of the century.

Goldman gets a lot of attention with these types of headline-grabbing figures, but they seem to be off base on this one. The EIA has confirmed that U.S. oil production is declining, already down 500,000 barrels per day since peaking earlier this spring at 9.6 million barrels per day. At the same time, demand is rising. Throw in some other major sources of expected growth in oil production that won’t pan out – a few million barrels per day of capacity that were expected from both Iraq and Brazil can probably be ruled out – and there is a recipe for a rather strong rebound in oil prices in the coming years. Obviously, the big question is when that will happen. The glut could persist through this year and next, but calling for oil to remain near $50 per barrel for 15 years seems like a stretch. Related: This Is What Needs To Happen For Oil Prices To Stabilize

The $70 billion takeover of BG Group (LON: BG) by Royal Dutch Shell (NYSE: RDS.A) ran into a road block in Australia this week. Australian regulators decided to push off a decision on the merger by two months due to a wave of opposition from Australian businesses worried about higher costs of natural gas. The companies are afraid that Shell will earmark Australian natural gas for export, leaving lower supplies for domestic consumption. Indeed, Shell and BG are both massive exporters of LNG, and the two companies are largely responsible (along with a few other companies, such as Chevron) for the massive ramp up in Australia’s LNG exports. Shell has had to crisscross the globe to earn regulatory approval from a list of national governments, due to the global operations of both Shell and BG. Australia said it would make a decision by November 12.

Statoil (NYSE: STO) brought the first subsea compression plant in the world online this week. The subsea facility, located at Asgard in the Norwegian Sea, will increase production by around 306 million barrels of oil equivalent, boosting output from the aging field. “This is one of the most demanding technology projects aimed at improving oil recovery. We are very proud today that we together with our partners and suppliers have realised this project that we started ten years ago,” Margareth Øvrum, Statoil’s executive vice president for Technology, Drilling and Projects, said in a statement. The subsea system will increase the ultimate recovery of the Midgard reservoir from 67 to 87 percent, and the Mikkel reservoir from 59 to 84 percent. Fields lose reservoir pressure over time, and compression boosts that pressure. But the closer you can get to the well, the more oil and gas can be recovered. Usually, compression is done at the sea surface on a platform. This is the first gas compression facility at the sea floor. It is illustrative of an important emerging trend in the offshore oil industry. Related: They're Giving Away Cash To Help Copper Miners Here

Moody’s Investors Service says that the world’s largest oil companies will continue to see their balance sheets take a hit. Over the course of 2015, the oil majors will see cash flow decline by 20 percent, the ratings agency says. That will result in negative free cash flow of nearly $80 billion this year, and the agency reaffirmed its “negative” outlook for the industry. Dividends appear to be safe for now, but that strategy will likely require further asset sales and cuts in capital spending programs.

The U.S. House of Representatives is moving on legislation to repeal the decades-old ban on crude oil exports. After previously passing a subcommittee vote, the full House Energy and Commerce Committee passed the bill this week by a 31-19 vote. Next up is the full House vote, which could take place in late September. The White House came out against the legislation this week, arguing that the decision to allow crude oil exports should be left to the Department of Commerce. The hotly contested issue has caused a clash between the upstream energy sector and downstream refiners.

Just as the legislative wheels to remove the export ban are picking up speed, an interesting development is underway between the WTI and Brent benchmarks. The spread between the two is narrowing, shrinking to its lowest level in eight months. For several years WTI had traded at a discount, owing both to the crude oil export ban in the United States as well as the resulting localized glut of oil trapped within its borders. Also, pipeline shortages led to oil being diverted into storage, pushing down WTI. But with new pipelines now in place, along with declining U.S. oil production, WTI is now converging towards Brent. And as the discount vanishes, so does the opportunity for U.S. oil exports. At the current spread, exports are largely uneconomical. Related: China Keeps Oil Prices From Falling As It Fills Its Strategic Reserves

The state-owned Colombian oil company Ecopetrol and Occidental Petroleum (NYSE: OXY) have announced plans to potentially invest up to $2 billion over the next 10 years at the onshore oil field La Cira-Infantas should the project prove successful in the early stages. The plan is to increase oil production to 50,000 barrels per day, up from 40,000 barrels per day.

Finally, in a bit of natural gas news, this fall could see an uptick in natural gas consumption as several nuclear power plants go offline for refueling. The EIA projects that 9 percent of the U.S.’ nuclear power capacity is currently offline, a number that could grow this fall. Between September and December, around 30 reactors could undergo refueling maintenance, which could lead to more natural gas consumption as natural gas-fired power plants pick up the slack. U.S. natural gas consumption could grow by 1.9 billion cubic feet per day in the third and fourth quarters (natural gas consumption averaged 28 bcf/d in early September, before the nuclear refueling began in earnest).

By Evan Kelly of Oilprice.com

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