Goldman Sachs: oil forecast for 2020 and beyond

CNBC reported on Goldman Sachs' 2020 outlook for oil:

International benchmark Brent crude is likely to continue trading at around $60 a barrel next year, Goldman Sachs said on Wednesday, in the absence of any “meaningful” energy market shocks. The U.S. investment bank said Brent crude futures had been caught between “worsening growth expectations and rising Middle East tensions” in recent weeks.

For context, Brent crude ended Friday trading (10/25) at $61.73.

What CNBC left out was what Goldman Sachs' was predicting for the future. Oilprice covered that:

“We believe this inflection may be around a year away,” Goldman Sachs wrote. The investment bank says that slowing U.S. shale production growth combined with a shortage of investment in long-term projects will lead to a new boom.

Goldman lowered its forecast for U.S. oil production growth to 0.7 million barrels per day (mb/d) in 2020, down sharply from its 1 mb/d forecast previously.

. . .“The last wave of 2014/15-sanctioned long lead time projects will be ramped up in the next 6-9 months,” Goldman said. The oil price crash that began in 2014 led to severe declines in investment in long-term megaprojects.

. . . Because those projects take years to come online, we are only now reaching the end of the pre-2014 project pipeline.

Goldman Sachs might see oil prices flatlining in 2020, but 2021 and onwards might lead to price increases. Oilprice mentions two drivers. First, shale growth will slow. Second, due to the oil price collapse that started in 2014, investments in oil exploration collapsed. Those final projects from the pre-crash hey days are coming online in 2020 (perhaps talking about Guyana) and after that far fewer projects will occur.

If Goldman Sachs is correct, the world might be in for a long period of high oil prices. As one can calculate from the article, it takes about 5 to 6 years for oil projects (excluding shale) to finish (2015 being the final projects and 2020 being the year those projects finally start producing oil).

OilPrice digs further into this investment problem via Rystad Energy:

Oil and gas companies have discovered 7.7 billion barrels of oil equivalent (boe) year-to-date, according to Rystad Energy’s latest global discoveries report. “The industry is well on track to repeat the feat achieved in 2018 when around 10 billion boe of recoverable resources were discovered,” says Palzor Shenga, senior analyst on Rystad Energy’s upstream team.

The so-called resource replacement ratio for conventional resources now stands around 16%, which is the lowest seen in recent history. “This means that only one barrel out of every six consumed is being replaced by new sources. This is the lowest replacement ratio we have witnessed in the last two decades,” Shenga added.

The article has a graph that indicates a replacement ratio of around 35% - 40% from 2013 - 2015. That ratio fell to below 25% for the years 2016 onwards.

So could US shale start to flatline in 2021? And conventional oil production start to decrease come 2021? Admittedly, OPEC+ is still holding back production so there is that. There might be some interesting calculations to make for 2021 forecasts.