Why Is Oil Price So Stubbornly High, Asks Goldman Sachs -- Barron's Blog

        By Shuli Ren
        Goldman Sachs has a problem with the oil rally.
        In a morning note, the oil bear tried to explain why we are seeing a recent rally even though its fundamentals are bad. Analysts Damien Courvalin and Jeffrey Currie talked about seasonality and the dollar:
        Calling the timing for prices to decline is challenging as we approach a period of seasonally stronger demand and potential China SPR fill. Further, the oil rally has occurred along with other macro reversals such as a rising Euro and a surprisingly large intraday inverse correlation between oil and the dollar since early April.
        So the recent oil rally is driven by the dollar. On Tuesday, WTI fell 3.65% to $57.26 while the dollar index rose 1.13% to 95.29 after the European Central Bank's Benoit Coeure said that asset purchases would be accelerated in May and June before the Europeans go on vacation.
        But Goldman Sachs believes that the price of oil will go back to the first-quarter low of $48 per barrel (Brent) by this fall. Goldman has found that U.S. shale gas production cost has now fallen to $60 per barrel. As long as WTI remains near $60 per barrel, there is incentive for US producers to ramp up production and venture capital to pump money into the industry:
        Oil markets have been fixated by the US rig count given its weekly frequency and potential insight into the shale production slowdown. Our work shows however that US production will still grow in 2016 at the current rig count given continued efficiency gains, signs of high grading and an elevated well backlog.
        We believe that should WTI remain near $60/bbl, US producers will ramp up activity given improved returns with costs down by at least 20%.
        Our bearish view has been driven by two surpluses: excess hydrocarbons but just as importantly excess capital. Apart from January, access to capital has been remarkably smooth with HY energy debt issuance back to accounting for 20% of US issuance and the equity market absorbing $12 bn of equity issuance since February without a glitch.
        Checking in on prices, China's PetroChina ( 0857.HK/ PTR) rose 0.5% on Tuesday, CNOOC ( 0883.HK/ CEO) fell 0.6% and Sinopec ( 386.HK/ SNP) gained 0.2%. BP ( BP) fell 1.3%, Exxon Mobile ( XOM) gained 0.2%.
        See also my May 17 blog " US Shale Breaks Even At $60, Goldman Sees Brent Crude At $55".
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        (END) Dow Jones Newswires

        May 19, 2015 20:31 ET (00:31 GMT)

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