Energy Sector Ideas

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>>> Oil Plummets to Near Six-Year Low After Goldman Sachs Slashes Price Forecast


January 12, 2015

By Chris Dieterich


http://blogs.barrons.com/focusonfunds/2015/01/12/crude-plummets-to-nearly-six-year-low-after-goldman-sachs-slashes-oil-price-forecast/?mod=yahoobarrons&ru=yahoo



There’s no bottom in sight for oil prices.

Analysts at Goldman Sachs say that U.S. crude needs to hover at $40 for most of this year in order to drown out oversupply from shale producers. West Texas Intermediate crude falls 4.4% on Monday to $46.26 a barrel, a nearly six-year low.

Goldman’s Jeffrey Currie says crude will fall as low as $39 a barrel in six months and trade at $65 in one year, down from estimates for $75 and $80, respectively. For 2015, Goldman’s Currie sees U.S. crude averaging $47.15 a barrel, down 36% from $73.75.

Currie notes a shift in how quickly capital now translates into increased shale production. That means crude needs to stay low for a long time to bring about price recovery.


“Capital investments are now a new margin of adjustment – a direct result of the collapsed time lag shale has created between when capital is spent and when production rises, as well as producers’ ability, through very high decline rates, to quickly throttle back production when spending slows.

However, the short-cycle capital nature of shale requires that such pressure remain in place in the coming months, likely creating a more U-shaped type of recovery with more downside risks.

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

We now believe WTI needs to trade near $40/bbl for most of 1H15 to keep capital sidelined.”

Exchange-traded products that track oil futures drop to new all-time lows. The United States Oil Fund (USO) declines 4.1% to $17.53, the lowest price since the fund began trading in 2006. The iPath S&P GSCI Crude Oil Total Return Index ETN (OIL) is off 5.1% to $10.55, similarly an all-time low.

Energy stocks are again by far the worst performers in the U.S. as the S&P 500 slips 1.1%. The Energy Select Sector SPDR Fund (XLE) drops 3.3%, while the Market Vectors Oil Services ETF (OIH) slumps 4.3%. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) declines 5.7%, while the First Trust ISE-Revere Natural Gas Index Fund (FCG) drops 5.5%.

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