Lower marginal cost is required to balance the oil market in 2019, Goldman Sachs Group, Inc., a leading global investment banking, securities and investment management firm, told Trend.
"New Oil Order is in fact earlier and more forceful than initially expected, requiring a lower marginal cost to balance the oil market in 2019 than in 2018 given: (1) higher inventory levels to start the year, (2) weaker than previously expected demand growth expectations (even at our above consensus forecasts), (3) the lack of shale cost inflation in 2018 and its persistent beat, (4) a greater than initially expected increase in Permian offtake capacity, (5) increased low-cost production capacity, and (6) the delayed ramp-up of long-cycle projects in Brazil and Canada," said the company.
Goldman Sachs said that even if physical markets recover, the 2019 supply landscape will change as the hiatus of the New Oil Order forecast in 2018-1H19 comes to an end when new pipelines release the low-cost Permian basin into the global oil market.
The weakening of oil fundamentals into a surplus in 2H18 and the downward revisions to realized and forward growth expectations - even if not as dire as the market is currently pricing - require less production in 2019-20 than expected a year ago, according to the company.
Further, Goldman Sachs said that after the precipitous and volatile late-2018 oil decline, exacerbated by low liquidity, prices are starting 2019 with their first meaningful rally in three months.
"Despite this rebound, we believe that price levels and term structure remain undervalued relative to both current and forward fundamentals," said the company.
"The oil market is still pricing-in a sharp slowdown in global growth despite our economists’ forecast for resilient growth and robust late-2018 oil demand data. Absent such a large slowdown, we expect prices to recover further, although growth uncertainty will likely require strengthening physical oil markets to drive this rally, with encouraging evidence that the OPEC cuts are starting."
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