Brent crude oil will trade at $55 a barrel in five years according to Goldman Sachs Group Inc., more than $10 lower than current prices and a discount of $20 to 2020 futures.
The bank assumes that long-term oil prices could drop as companies make “efficiency and productivity” improvements, according to an e-mailed report dated May 15. Shale oil producers could break even with West Texas Intermediate crude, the U.S. benchmark, as low as $50 a barrel by 2020, it said.
Oil’s rally from a six-year low in March is stalling as U.S. output remains near a record even as the number of rigs drilling for oil in the nation shrinks. Producers battered by the steepest market collapse in a generation are signaling for the first time that they believe the worst is behind them.
“The cost curve for oil is shifting sharply lower, driven primarily by deflation in U.S. shale,” said Goldman Sachs analysts including Michele Della Vigna. “Companies’ focus on cost cutting means that break-even prices for pre-sanction projects will likely fall.”
Goldman Sachs cut its estimate for Brent for 2016 to 2018 to $65 a barrel. Brent for July settlement traded at $66.74 a barrel on the London-based ICE Futures Europe exchange at 2:01 p.m. local time, while December 2020 futures were at $77.02. WTI for June delivery traded at $60.10 a barrel on the New York Mercantile Exchange, while the December 2020 contract was at $68.92.
U.S. shale drillers Carrizo Oil & Gas Inc., Devon Energy Corp. and Chesapeake Energy Corp. all lifted their full-year production outlooks this month. EOG Resources Inc. said May 5 it plans to increase drilling as soon as crude stabilizes around $65 a barrel, while Pioneer Natural Resources Co. has said it is preparing to deploy more rigs as soon as July.
Later-dated WTI crude futures may be “hit especially hard” as U.S. producers hedge their exposure to price moves by selling oil contracts, Morgan Stanley said in a note Monday. Should oil prices remain low, companies will have to raise more funds, adding to the hedging pressure, the bank said.