Crude Hits 5.5yr. Low As Goldman Sachs Slashes Forecast

Crude Hits 5.5yr. Low As Goldman Sachs Slashes Forecast

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Timothy Moe, Co-Head of Economics, Commodities, and Strategy at Goldman Sachs, said oil is likely to go lower, and the firm slashed its forecast for both Brent and West Texas Intermediate (WTI), according to various news outlets. Brent Crude is falling today, down $2.49, or -5.07 percent, to $47.57; while WTI is falling $2.04, or -4.16 percent, to $46.38. The DOW, S and P, and the NASDAQ are all lower on the news.

Reuters News Service reported that “Goldman Sachs cut their three-month forecasts for Brent to $42 per barrel from a previous forecast of $8;, and, for West Texas Crude to fall to $41 from a previous forecast of $70. Goldman also cut its full-year forecast on oil — with a Brent target of $50.40; and, a WTI forecast of $47.15 — both of which were lower than previously forecast.

“To keep all capital sidelined, and curtail investment in shale until the market has rebalanced, we believe prices need to stay lower for longer,” the firm said.

Speaking at a Reuters Global Oil Forum, Commerzbank analyst Carsten Fritsch said he excepted output costs to start impacting prices in the second half of 2015. “At some point, market participants will realize that a lot of oil will leave the market — if prices stay low.”

When, And Where, Is Oil Too Cheap To Be Profitable?

John Schoen, writing on CNBC’s website today, writes that “at some point, it’s not profitable to pull it out of the ground. But, we’re not there yet, according to an analysis of production costs by an energy consulting firm. Even if oil falls another 20 percent from Friday’s closing price — to $40 per barrel — just 1.6 percent of the world’s oil supply would represent unprofitable production.”

Energy consultant, Wood Mackenzie, “analyzed production data from 2,222 oil fields around the world, just to see how much further oil prices would have to fall to make them ‘cash negative,’ — costing more to operate than the oil is worth. That price can act like a brake on production,” said Wood Mackenzie analyst Robert Plummer. “Once the oil price reaches these levels, producers have a sometimes complex decision to continue producing, losing money on every barrel produced; or, to halt production, which will reduce supply,” he said.

“Among the first to shut the spigots, would be the U.S. onshore production, from the trickle of crude emanating from aging, so-called stripper wells. Wood Mackenzie estimates that there’s about a million barrels a day, coming from a collection of older wells that only produce a few barrels per day. The cost of keeping them going varies between $20-$50 a barrel. So, if the price of crude drops below $40 per barrel, some producers may decide to stop pumping,” Mackenzie noted.

“Below the $40 a barrel level, the next likely production showdown would come from Canadian tar sands fields, which starts to lose money when the Brent price hits the high $30 range. But, turning the flow off, and restarting it again — is a complex process, involving injecting steam into the ground, which makes it costly to restart,” according to Wood Mackenzie. “On the other hand, fuel represents a major cost for oil sands production, so lower oil prices could help lower overall production costs,” Mr. Schoen wrote.

“In the U.K., North Sea oil fields start to lose money below the $50 a barrel price,” according to Mackenzie’s analysis. “But, many of them are older fields, reaching the end of their lives, so stopping production could mean slowing down for good. That decommissioning process can be expensive, so some companies may decide to operate at a small loss, rather than spend the money to close down operations,” Mackenzie noted. V/R, RCP

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