Goldman Sachs have lowered their outlook for oil prices over the next couple years, predicting that OPEC will lose influence over the oil market due to the US shale boom.
We are lowering our oil price forecast to reflect the required slowdown in US production growth: our WTI crude oil forecast is $75/bbl for 1Q15 and 2H15 (from $90/bbl previously). Given our unchanged WTI-Brent spread forecast of $10/bbl, our Brent forecast is now $85/bbl ($100/bbl previously). Our forecast path reflects our expectation that timespreads will be weakest in 2Q15 when the global oversupply will be largest with Brent prices reaching $80/bbl and WTI prices $70/bbl. In 2016 we expect stabilizing fundamentals with moderate cuts to OPEC production once a slowdown in US production growth is apparent. Our 2016 and long-term forecasts are now $80/bbl WTI, $90/bbl Brent.
They note that uncertainty around the required price to slow down US shale production growth is a key risk to their price forecast. According to the bank WTI prices will need to decline to $75/bbl to see a slowdown in US output growth.
The bank also notes the loss of pricing power from key OPEC producers.
Accordingly, our forecast also reflects the realization of a loss of pricing power by core-OPEC. Consistent with the economics of the “dominant firm/competitive fringe” market structure and shale production exceeding OPEC spare capacity, pricing dynamics in the oil market have moved away from the dominant firm’s production decision and towards the marginal cost of US shale oil production.
Whether OPEC and Saudi Arabia in particular will be able to restore that power or not the Saudi’s appear to have little incentive to do much now and maybe for some considerable time. According to Deutsche Bank, the Saudi government can sustain itself for almost 8 years with Brent crude at $83/bbl. The government has accumulated sufficient “rainy day funds” to withstand a prolonged period of budget deficits driven by low oil prices.
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