Stable shale production could lead oil to $20

21 December,, Lagos – As the crude oil debacle continues, Goldman Sachs has made bold prognosis that the commodity could deep as low as $20 per barrel, based on the current Organization of Petroleum exporting countries (OPEC) and shale production levels. According to the bank, with crude oil presently trading around $35/barrel, the weak prices are expected to help curb U.S. production by over half a million barrels per day next year. Even so, at present, the US rig count and domestic oil-company spending budget remains too high to ease the global oil glut.

“Financial stress may prove too little too late to prevent the market from having to clear through ‘operational stress,’ with prices near cash costs to force production cuts, likely around $20 a barrel,” Goldman analysts wrote in a research note to clients

Shale production expected to remain stable

Goldman opines that investment-grade oil producers who are responsible for about 85 percent of U.S. crude have not been hit as hard by the market downturn as smaller rivals with high levels of debt. The larger firms have been spared because of their higher exposure to financing, as many will not worry about banks reducing their credit lines and rely less on oil hedges to guarantee cash flow. According IHS, U.S. oil companies have only hedged 11 percent of production next year.

Looking forward, large crude oil producers are expecting to maintain stable output next year. This is as against speculation of production declines, which could help rebalance the market by the end of next year. Also, investors may be willing to “finance funding gaps that are the investment-grade levers of adjustment” since the broader investment sentiment is that shale oil production will grow in the next couple of years.

“This creates the risk that if investor capital is available to accommodate producers’ funding needs, the slowdown in U.S. production will take place too late or not at all,” Goldman said.

Iran input

Another factor is the fact that Iranian crude production is likely to grow beyond the 285,000 barrels a day it expects. Therefore increasing OPEC’s output above the 32 million barrels a day, Goldman expects next year. At present, oil production overshoots requirement by 1.5 million barrels a day.



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