Goldman Sees Oil Deficit: What This Means For Energy Players

Are good times for oil exploration and production players really knocking at the door? The question may jolt investors out of their blues especially after witnessing the markets closing in the red on and off due to plunging crude prices. In fact, the general belief is that wherever oil goes, the market follows.

However, the oil market is no longer oversupplied. In fact, a deficit in the space has been pointed out in a statement issued by leading investment bank The Goldman Sachs Group Inc. (NYSE:GS) . With this shortfall, the bank believes that oil price will rise to $60 by this year end.

Going Deep into the Story

Major energy companies have been hit hard for long by weak oil prices following an oversupplied commodity market. Even big oil producers met a few times to figure out measures to lower production as they saw this as the best way to make crude price take a U-turn amid lackluster global demand.

But unfortunately none of the major players agreed on production cut despite continuously falling oil price that touched the 12-year low in February this year. In other words, they have been in a race where the fittest will survive and the others will simply be wiped away from the market.

It is to be noted that the Organization of the Petroleum Exporting Countries (OPEC) have been increasingly pumping crude since their economy is highly dependent on oil. According to Reuters, last month, OPEC extracted almost 32.44 million barrels of oil per day (Bbl/d), which is up by 188,000 Bbl/d from March this year. Most importantly, this monthly jump is the highest level since 2008.

However, in such a scenario, Goldman revealed that it is surprised by the sudden deficit that it has felt in the oil market after the glut seen for two years. In fact, the crude market has turned deficit sooner than the investment management firm expected.

Let’s analyze the factors that led Goldman to believe that the crude market has likely become deficit in May and will remain so for the rest of this year.

Supply Disruptions: Goldman’s projection of a deficit in the oil market throughout the second half of this year stems primarily from interrupted crude supply in Nigeria, the U.S. and China.

Exxon Mobil Corporation (NYSE:XOM) , the world’s largest publicly traded oil company, has suspended exporting Qua Iboe crude following a pipeline attack in Nigeria. This took Nigeria’s output to a record low mark in decades. Qua Iboe oil was pumped from many offshore fields in south-eastern Nigeria and is the largest source of oil in the country.

In the U.S., many shale producers − who relentlessly went on producing crude last year for a lead in the market share race with OPEC players – have gone bankrupt following ballooning debt in their balance sheet. As per U.S. Energy Information data, domestic crude production has fallen to a level which is 8.4% below the peak seen in 2015.

Moreover, according to media sources, China witnessed crude output of 4.04 million Bbl/d in April this year, reflecting a 5.6% decline from the year-ago level.

Sustained Demand: Goldman projects 2016 worldwide crude demand to improve by 1.4 million Bbl/d, which is higher than its prior expectation.

Conclusion

With supply disruption and increased expectation for global oil demand in 2016, Goldman foresees oil price to improve to $60 by this year-end. So definitely it will be a huge development on the crude front if the deficit turns into a reality.

This will be great news for oil exploration and production players and for the integrated energy firms. This is because they will be able to sell the commodity at improved prices and thereby generate considerable cash flows in the coming quarters for their shareholders. Some major energy players that might benefit are Chevron Corp. (NYSE:CVX) , Royal Dutch Shell (LON:RDSa) plc RDS.A and BP plc (NYSE:BP) . Oil field services companies like Schlumberger Ltd. (NYSE:SLB) and drilling players like Transocean Ltd. (NYSE:RIG) may also be favored since they help upstream energy firms to efficiently drill oil wells.

However, Goldman said that this deficit crude market will not last forever. In fact, the investment bank added that the oil market will again become oversupplied from the start of 2017. This might be because increased oil price in 2016 will encourage producers to get into more exploration and production activities, leading to a glut in the oil market again.