Goldman Sees Oil at $50 at the End of the Decade

Bank forecasts a "New Oil Order"

Oil Set for Third Quarterly Drop as Deadline in Iran Talks Looms

Oil - lower for longer?

Photographer: Akos Stiller/Bloomberg

As oil prices fell from more than $100 a barrel to a low of $43.46 over the past year, analysts and economists constantly tried to pick a bottom and had little success.

Now, they are trying to forecast a recovery, but Goldman Sachs is out with a note this morning titled New Oil Order predicting oil will stay at lower levels for the rest of the decade. 

We see potential for OPEC/the US to gain share longer term, even as WTI falls from $60 to $50 by the end of the decade.

The note is meant to predict what companies are poised to do well in an environment with lower oil prices, but the call for $50 just by itself is notable. Other market analysts have made predictions for oil to move at least slightly higher over the longer term, as they forecast that non-OPEC related supply will start to shrink. Goldman, on the other hand, reckons that the shale boom will continue even as OPEC refuses to cut back on production. Here are the Goldman analysts led by Brian Singer:

While the sharp reduction in US drilling activity is likely unsustainable, greater productivity in shale, startups of already sanctioned other non-OPEC projects and a greater willingness of OPEC to keep production levels elevated create a confluence of deflationary pressures for both oil and North American natural gas prices ... We now assume WTI oil prices of $57/$60/$60 per barrel in 2016/17/18.

This also leads Goldman to predict further M&A in the oil and gas sector, especially over the next year.

We believe the decline in oil prices and potential lower-for-longer environment will drive increased M&A activity over the next 12 months ... Super Majors have the cash and are likely potential consolidators ... Companies with strong assets/weak balance sheets that do not have advantaged costs of capital should sell. Those with weaker assets/strong balance sheets should buy. Companies with strong assets/strong balance sheets should go it alone or issue equity. And those with weak balance sheets/weak assets should consider wider options...History suggests M&A activity picks up during periods of commodity weakness. Our analysis of past cycles shows transactions increased at periods where it appeared the market had bottomed and a recovery was in sight. Stocks under coverage with M&A components in price targets include Buy-rated ATW, RES and Neutral-rated OII, RDC.

 In case you need a reminder, WTI crude is currently at about $60 a barrel.

 

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