Crude prices dove below $80 (U.S.) a barrel in trading Monday after Goldman Sachs Group Inc. released a grim forecast that argued prices have further to fall and won't recover until some U.S. unconventional oil producers are squeezed out of the market.
The United States has been the world's fastest growing crude producer thanks to the shale oil boom on North Dakota and Texas, but Goldman said the pace will slow as North American crude prices plunge as low as $70 a barrel by next spring. They forecast West Texas Intermediate will average $75 a barrel in the second half of 2015, and $80 in 2016.
"We are lowering our oil price forecast to reflect the required slowdown in U.S. production growth," Goldman analysts wrote. They rejected any suggestion that top producers from the Organization of Petroleum Exporting Countries, led by Saudi Arabia, would come to the rescue of global producers.
"We believe that OPEC will no longer act as the first-mover swing producer and that U.S. shale oil output will be called upon to fill this role," they said.
In morning trading, both international and North American prices fell sharply, with WTI slumping to a 28-month low of $79.44 before rebounding to close just about where it started the day at $81.00 a barrel. Brent fell to a low of $84.55 before paring losses to settle down 30 cents on the day at $85.83 a barrel.
Many analysts reject the notion that U.S. shale, or tight oil, producers will cut back on investment or shut in wells without a sustained period of sub-$80 oil prices. Some have pointed to Canada's oil sands as the high cost, marginal producers who would be among the first to cut back on investment, if not current production. Others argue OPEC itself is going to have to take the lead in production cuts at its November meeting.
"I don't think we've seen any impact at all [on U.S. drilling levels] and I don't think we're going to see any impact soon," said Anthony Starkey, an analyst at Bentek Energy, which is a division of Platts, a global provider of energy and other commodity information. "And until you have really sustained low oil prices for an extended period of time, I don't think you're going to see these guys cut back on their drilling."
Mr. Starkey said the vast majority of U.S. producers have break-even costs at $75 or below and many are fully hedged by selling forward their production. However, he added companies operating in the U.S. shale oil fields have typically relied on debt-financing, rather than positive cash flow, to fund their drilling programs, so future activity will depend on the willingness of lenders to extend them credit.
Calgary-based Precision Drilling Corp. said oil's skid has yet to affect its business, but that could change as its North American customers prepare their budgets for 2015 and commodity prices remain under pressure. Precision Drilling, which specializes in oil field services, has the flexibility to immediately stop building new rigs, executive have said.
"If these prices discourage our customers from expanding activities, we can throttle right back down to zero [new] rigs if we chose to," chief executive Kevin Neveu said during a conference call. The company was forced to make such adjustments in late 2013 and early 2014.
"It is a little painful going up and down like that, but it is just core to our strategy," Mr. Neveu said.
The long slide in crude prices started this summer and picked up steam in September. It has rippled through the equity markets, with leading Canadian energy companies experiencing significant losses in share prices. The S&P/TSX Energy Index fell 3 per cent on Monday. In recent weeks, it has lost all the value built up in the first half of the year, and then some.
This week, Seven Generations Energy Ltd., a private explorer of shale gas in Alberta, is scheduled to launch its much-anticipated initial public offering aimed at raising $800-million (Canadian). The energy downturn has raised questions about whether the company, known for its prolific Kakwa River development in Alberta's Montney region, might delay the deal. It has already lowered its expectations for proceeds.
However, sources said on Monday that demand for the shares was strong, albeit likely at the lower end of the expected range of $17-$21 a share. The offering, led by RBC Dominion Securities Inc., Credit Suisse and Peters & Co. Ltd., is expected to be priced on Wednesday.