Crude oil prices are trending along six month highs, prompting relief and optimism for the weary oil and gas industry. West Texas Intermediate seems to have stabilized around $60 for the time being, but not till after rig counts plunged by approximately 60% and United States production leveled off for the first time since the shale boom began.
In the recent conference call season, several E&Ps at least hinted at the possibility of adding rigs to the fleet if oil remains in the $60 to $70 range. Good news for the industry, right?
Wrong, says Goldman Sachs, who says a potential activity increase will only send prices back to the $45 trough by October. “Our bearish view has been driven by two surpluses: excess hydrocarbons, but just as importantly, excess capital,” says a note from the firm. “We find that the global market imbalances are in fact not solved and believe that the rally will prove self-defeating as it undermines the nascent rebalancing.”
Increased efficiencies and previously uncompleted wells being brought online will place more downward pressure on oil prices, Goldman says. For example, well completions in North Dakota more than quadrupled on a month-over-month basis in March.
Companies reloaded their strained balance sheets with $31 billion of debt in January and February, providing a longer lifeline for operations. Some companies ceased operations in less marginal regions but may ramp up the activity if oil remains above the $60 threshold.
Goldman’s Bearish View
Goldman preached about the consequences of oversupply in February, saying the rig count drops were not enough to offset the oversupply. Their premise has remained consistent throughout WTI’s gradual climb. In early April, the firm said “Any meaningful price recovery on evidence of declining production and U.S. crude inventories would further undermine the U.S. rebalancing process,” – an estimation they followed in their most recent analyst note.
The combination of OPEC’s higher than normal output (April 2015 volumes were a 29-month high) and an expected stagnancy of near-term demand from Asian markets prompted Goldman to slash its Brent forecasts for the rest of the decade. Goldman’s Brent benchmark is projected to range from $55 to $65 through 2020.
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