FXStreet (Delhi) – Research Team at Goldman Sachs, notes that over the course of 2015, oil demand was spectacularly strong, especially in light of the modest slowing in global growth, but the supply surprise was even larger, the result of which was an even greater decline in oil prices than we originally forecast.
Key Quotes
“One remarkable fact in hindsight is the extent to which shale’s relatively low-cost and (dramatically) shorter development cycle has increased the supply of non-shale producers. With the advent of shale, the role of ‘swing producer’ transferred from a few large producers with market power (such as Saudi Arabia) to a fragmented competitive market of price-takers (North American shale producers). Efforts to raise prices by withholding supply would now be met by increased supply from shale, thereby neutralizing the upward pressure on prices. While the basic outlines of this new strategic dynamic were already visible in the fall of 2014, it has nonetheless been remarkable to witness how significantly the supply incentives of former-monopolists have increased.”
“On our Energy team’s most recent estimates of marginal cost for shale, WTI oil prices rise to $52/bbl by the end of 2016. Moreover, between now and the end of 2016, there is a growing risk that oil inventories could swell to full capacity. On current trends, our team does not expect the limits of storage capacity to be reached. But there is always the risk that demand will unexpectedly fall short (or that supply will surprise), at which point the only way to clear the excess supply in the physical market for oil is with sharp price declines . Given the high exposure to the energy sector in global credit markets (most notably in EM and US high-yield), this downside risk to oil is among our top downside risks to credit and risky assets more generally.”
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