What are we to make of Goldman Sachs Group Inc.'s new, and surprisingly low, oil price forecast?
In a fresh report, Goldman predicted that prices for Brent crude, the main international benchmark, will fall to $55 (U.S.) a barrel in 2020. (Monday's price was $66, down 1 per cent.) Its previous forecast was $70. If the forecast proves accurate, a whole lot of high-cost producers, among them the Alberta oil sands, are going to be in a whole lot of pain.
The temptation is to dismiss the Goldman report, which also predicts $58 Brent crude this year and $62 next year, as a mix of delusion and fantasy. Goldman was the firm that boldly predicted $200 oil in 2008. A few months later, the collapse of Lehman Brothers Holdings Inc. ever so rudely made a mockery of the forecast; oil went to $40.
Unperturbed by the spectacular miscall, Goldman last year predicted a rebound in commodity prices, driven by the global economic recovery. Wrong again. Commodities sank and oil crashed again, hitting a low of $45 in January. West Texas intermediate, the United States benchmark, went even lower, reaching $42 in March. Both benchmarks were well over $100 last June.
Goldman is not alone, of course, in making embarrassing forecasts. A few months ago, when oil was still falling, Citigroup Inc. became captivated by the downward trend and said prices could hit $20. They got nowhere near that level.
Still, Goldman's forecast for $55 oil should not be dismissed, even if it seems foolhardy to forecast a price five years out.
A couple of the factors behind Goldman's forecast are fairly obvious By now, the energy markets know that OPEC will not only avoid cutting production to support prices, it will actually increase production to keep prices down and buy market share. Saudi Arabia, OPEC's main swing producer, keeps cranking open the spigots. In April, it officially produced 10.3-million barrels a day, up by about 700,000 barrels over the same month a year ago. PetroMatrix GMBH, the Swiss oil consultancy run by Olivier Jakob, said that OPEC is on course to produce 31.6 million barrels a day in June, a year-on-year rise of 1.4 million barrels. Goldman also notes that a few big oil projects with relatively low break-even prices, among them Brazil's enormous Santos Basin field, will put downward pressure on prices.
What is less obvious is that OPEC is rapidly losing clout in the price-setting game. That role is going – or has already gone – to the American shale oil producers, which, unlike the oil sands, have the ability to react quickly to price swings. When prices fall, the rig count drops and production gets trimmed, lifting the price, and vice versa. As Goldman notes, what is new is that the shale oil producers have become massively more efficient as the price drops. They have squeezed big discounts out of their suppliers. Their productivity has soared. Citing Daniel Yergin of the research firm IHS, the Economist magazine reported that shale wells that used to take 35 days to complete now take 17. The amount of oil produced for every dollar invested will rise by 65 per cent this year.
According to some estimates, shale oil break-even costs have fallen by as much as $20 a barrel in the last year. That means shale producers can make money even at relatively low prices.
PetroMatrix, whose own forecasts have been amazingly accurate, recently invented the term "shale band" – the price range between $45 and $65 a barrel – to predict shale-oil production trends and, hence, prices. Below that range, production falls a lot; above it, the opposite happens. If PetroMatrix is right, oil will have a tendency to stay within that range. Not surprisingly, the Goldman forecast for $55 oil falls at midpoint in the PetroMatrix band.
On Monday, in an e-mail, PetroMatrix's Mr. Jakob pronounced Goldman's forecast "credible" as long as OPEC doesn't resume its old tactics of using production cuts to pop up prices. So far, OPEC seems determined to allow the market to find is own level. Goldman has had two big dud oil calls so far. Third time lucky?
Eric Reguly