Goldman Sachs is standing by its own base oil price scenario of $50 a barrel, anticipating a stable future for the commodity, with price fluctuations in the range of 10-20 percent and no tumultuous ups and downs.
The expected stability will come on the back of technology that is pulling down exploration and production prices, the investment bank said, and whose potential for price disruption is now much smaller than it was when it was first introduced, sending prices sky-high. The industry has gotten used to its reliance on technology, apparently, and the prospects of a second shale revolution or an equally radical development elsewhere are equally slim.
In a research note, the bank radiated serenity, saying that "We believe we are going back to an environment similar to pre-2003, a period characterized by stable long-term oil prices and low oil-dollar correlation." According to the head of its commodity department, Jeff Currie, the relationship between the dollar and commodities has broken down – something he considers the most important development in commodities.
What this means is that, if Currie and the rest of Goldman’s analysts are right, from now on we are less likely to see the usual price drop in commodities whenever the greenback rallies, all thanks to that expected stability in oil prices. This will help major oil producers patch up their budget gaps and ensure stable returns, the bank also said. Related: China Just Became The World’s Top Oil Importer
The premise for this outlook is that shale oil has become the primary source of the commodity and this will continue to be so in the long run: cheap, secure supply. Not everyone in the industry shares that belief – one person familiar with the matter suggested to Oilprice.com that U.S. shale resources may well be overestimated and costs underestimated – something that we are already seeing as oilfield service providers are upping their rates.
Then there is the issue of fracking-related earthquakes, which could limit this particular segment’s expansion through public pressure.
What’s more, Big Oil is betting as much on shale as it is on deepwater offshore reserves, and costs there are going down as well, to $40 a barrel in some locations, with plans for bringing this down to $15 a barrel. If this becomes a reality, offshore oil is bound to become more abundant.
This means even cheaper oil and a possible glut, which Goldman itself has predicted for the next two years. Record spending at the start of the current decade put the foundations of megaprojects that are expected to come online between 2017 and 2019. This, the bank said, will lead to the “largest [oil and gas production] increase in history.” Related: U.S. Oil Production, Imports Rise Faster Than Expected
If the glut comes to pass, prices are bound to fall. They could even stay lower than Goldman’s estimates as energy demand switches from oil to LNG and renewable sources – two other long-term trends that will certainly influence oil prices.
There is one more thing that could pressure prices: Arctic exploration. For the moment, there is no rush for it, at least in North America. One Goldman Sachs commodity analyst told CNBC last month there was no justification for Arctic exploration in the U.S. because of – again – shale. But elsewhere, where there is no shale exploration, the Arctic is a pretty attractive place to be. Statoil and Lundin are venturing further north in the Barents Sea, and Russia has been exploring in the Arctic for decades, now producing from two fields and planning more.
So, despite Goldman Sachs’ confidence in WTI prices staying around $50 a barrel in the next decade or so, there are at least two ways that this could turn out wrong. Unfortunately for the industry, the upside potential for prices seems to be limited to geopolitical events and developments and unexpected outages – pretty much the same things we are seeing now to push up prices, countering the effects of excessive supply.
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By Irina Slav for Oilprice.com
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