Goldman sees US oil output unscathed as costs decline
US producers battling OPEC for market share may increase output further from the highest rate in more than three decades as costs decline almost as fast as oil prices, according to Goldman Sachs Group Inc.
The slump in benchmark US crude futures, which are down more than 40 percent this year, is driving producers to move drill rigs to lower-cost fields, the bank said in an e-mailed report Monday. While there’s evidence of some rebalancing starting to occur in the market, that isn’t sufficient, it said.
A decision last month by the Organisation of Petroleum Exporting Countries to maintain its output target prompted speculation that the group is willing to let crude slide to a level that would slow US production.
Smaller member-nations including Venezuela, which have called for action to support prices, may play a role in rebalancing the market, Goldman said.
“Costs are falling nearly as fast as the price, which means oil producers can spend less to get the same or potentially even more in terms of production,” the bank said. “While reductions in capex are coming faster than expected, it is unlikely to translate into less supply” it said, adding that drill-rig rates have dropped as much as 20 percent.
ConocoPhillips, the third-largest US energy producer, cut its capital expenditure by about 20 percent for next year amid the price slump driven by horizontal drilling and hydraulic fracturing that have opened up shale formations.
West Texas Intermediate for January delivery fell $2.14 to $57.81 a barrel on the New York Mercantile Exchange on December 12, the lowest close since May 2009.
While data from Baker Hughes Inc. shows US producers idled the most rigs in two years last week, this count was almost entirely for vertical machines, not the horizontal drillers used for shale output, according to Goldman.
OPEC will stand by its decision not to cut output even if oil drops to as low as $40 a barrel and will wait at least three months before considering an emergency meeting, United Arab Emirates Energy Minister Suhail Al-Mazrouei said at a conference in Dubai.
The 12-member group maintained its collective target of 30 million barrels a day at a November 27 meeting in Vienna.
WTI will average $70 to $75 a barrel next year and Brent, the European benchmark grade, will trade at $80 to $85 in London, Goldman reiterated on November 27.
Crude price forecasts that are based on outdated cost data create a further downside risk because those expenses are shifting as fast as oil prices, according to the bank. The market view that the market can rebound “not only suggests that oil prices can go lower for longer, but also that the new normal is far lower than we thought just one month ago,” it said.
In the three geologic formations that account for 88 percent of US shale oil output – North Dakota’s Bakken and the Eagle Ford and Permian in Texas – explorers can drill new wells profitably in some areas even if crude falls to $25 a barrel, according to ITG Investment Research Inc.