Shale makes it hard to predict

London, April 10: The shale oil boom has transformed the US and global energy sector to such an extent that it has upended traditional supply dynamics and made forecasts polarized.

Investment banks along with oil majors such as Total and Eni, have warned that huge spending cuts caused by a plunge in oil prices since 2014 would lead to a supply crunch in the next two years.

Yet Goldman Sachs, the only bank to make more than $1 billion a year from commodities trading, believes a looming recovery in US output on the back of higher oil prices combined with an avalanche of new conventional projects will create a substantial surplus by 2019.

Prior to the shale revolution, conventional oil was the only game in town. Estimating future supply essentially involved calculating the project pipeline and factoring in the “unknown knowns” such as political risk in oil-producing nations.

The ability of the shale sector to adapt quickly and nimbly to a lowerprice environment means production cycles have shortened as fields can be switched on and off in a matter of weeks.

Most forecasters including OPEC and the International Energy Agency underestimated shale's decline during the oil price collapse and its production increases as prices recovered.

Goldman predicts the coming two years will see a huge burst of development, complicating OPEC's efforts to rebalance the market and ease a global glut with the help of output cuts. “This long leadtime wave of projects and a short-cycle revival, led by US shales, could create a material oversupply in 2018-19,” Goldman’s equity research team said.

“As OPEC prepares for its May 25 meeting, it is likely to weigh the relative benefit of stability (extend cut) versus the risk of long-term share loss.”

Goldman estimates that new projects and rising shale output could add 1 million barrels per day (bpd) to global supply by 2018-2019.

The forecast contrasts with those of consultancy Wood Mackenzie, which foresees a supply gap of 20 million bpd by 2025, and Goldman's rival Morgan Stanley, which believes a surge in US production this year will not derail the rebalancing.

GOLDMAN SACHS stands by its prediction that supply and demand will fall into line this year even though global crude inventories in developed economies alone top 3 billion barrels