Oil prices, which have fallen by more than half since June, need to drop even further and stay there for the first half of the year for the market to find a balance between supply and demand, Goldman Sachs Group Inc. says.

With OPEC resisting a production cut to stem the price slide, output reductions will come from U.S. shale drillers, who are pumping at the fastest pace in three decades, according to an e-mailed report by Goldman analysts including Jeffrey Currie in New York. Excess storage and tanker capacity suggests the market can run a surplus longer than it has in the past, so oil at around $40 for six months will be needed to slow U.S. producers, they said.

The bank reduced its six- and 12-month predictions for West Texas Intermediate, the U.S. benchmark, to $39 a barrel and $65, from $75 and $80, respectively, while its estimates for Brent, the global benchmark, were cut to $43 and $70, from $85 and $90, according to the report.

Marginal Cost

“We forecast that the one-year-ahead WTI swap needs to remain below this $65 a barrel marginal cost, near $55 a barrel for the next year to sideline capital and keep investment low enough to create a physical re-balancing of the market,” the bank said.

Qatar estimates global surplus of crude at 2 million barrels a day. Goldman says there’s sufficient capacity to store half that for almost a year. The bank expects the spread between WTI and Brent to widen in the next quarter as discounted U.S. crude prices and “strong margins lead U.S. refineries to export the glut to the other side of the Atlantic.”

The Brent-WTI spread will average $5 a barrel in 2016, according to the bank. The gap was at $1.50 today.

Goldman doesn’t expect that Saudi Arabia or other core members of the Organization of Petroleum Exporting Countries will cut production, versus its previous expectation that the group would help balance the oil market in the second half of 2015, according to the report.

U.S. Shale

“This is anchored on our expectation that the slowdown in U.S. shale oil production in second-half 2015 will be sufficient to clear the market overhang and the threat of capital being quickly redeployed to restart U.S. production growth,” it said.

Thirty-five horizontal rigs, used to reach oil deposits in tight rock formations such as North Dakota’s Bakken shale and Texas’s Permian Basin, were idled last week in the U.S., Baker Hughes Inc. (BHI) said on its website Jan 9. It was the biggest single-week drop since the drilling boom started six years ago.

Oil at $45 a barrel would curb North Dakota’s output by 100,000 barrels a day to 1.1 million a day by early July, the state’s Department of Mineral Resources said in a presentation on its website dated Jan. 8. Production would continue to slide to 1.05 million barrels a day by the middle of 2016, it said.

OPEC, which pumps about 40 percent of the world’s oil, has stressed a dozen times in the past six weeks that it won’t curb output to halt the slump in prices. The group decided to maintain its collective quota at 30 million barrels a day at a Nov. 27 meeting in Vienna. Production averaged 30.24 million barrels a day in December, according to a Bloomberg survey.

Brent for February settlement dropped as much as $2.93, or 5.9 percent, to $47.18 a barrel on the London-based ICE Futures Europe exchange. WTI fell as much as $2.46 to $45.90 on the New York Mercantile Exchange.
Source: Bloomberg

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