US oil output growth to slow sharply: Goldman

US onshore oil output growth will fall more sharply by the fourth quarter of the year than prior expectations as producers cut spending plans and delay completion of wells amid the plunge in oil prices, Goldman Sachs said today.

The bank's current estimate of year-on-year US oil output growth for 2015 is 573,000 b/d in 2015, versus its end-October forecast of 950,000 b/d, which itself was a reduction of an earlier 1.1mn b/d expectation. That compares to an "astonishing" 1.5-1.6mn b/d increase in supply in December and January and an average of 1.2mn b/d in the last three months, it said.

US oil output growth will be the strongest for the year in the first quarter, at 1.19mn b/d, slowing to 653,000 b/d in the second, 329,000 b/d in the third and to just 120,000 b/d in the fourth, according to Goldman Sach's current estimates.

Total US production should equal 9.412mn b/d by the end of 2015, according to the bank's base case, up from the Energy Information Administration-estimated 8.67mn b/d at the end of 2014.

The deceleration in growth points to an upside risk in the bank's Nymex WTI price forecast of $40.50-$44/bl for the second and third quarter as producers stand ready for a "swift ramp up once returns improve, as early as the third quarter." Yet a rapid return of US supply, also aided by falling service costs and a growing inventory of drilled-but-not-completed wells, could cap any significant upside in prices.

With supply reaction unlikely to kick in until the middle of the year, global oil inventories continue to increase, with the majority of inventory builds coming in the US. Traders are taking advantage of the large amounts of available US onshore storage, the bank said.

As a result, Brent-WTI has widened from near parity to almost $10/bl, surging well past Goldman's forecast of $3/bl in 2015 and $5/bl in 2016. Given that an immediate letup in US supply growth is unlikely the record pace of inventory builds may mean "WTI would have to decouple significantly from global oil prices."

Globally, spending is expected to fall across most regions except for Russia, with Canadian explorers leading with a 34pc reduction in 2015 versus a year earlier. This will be followed by Latin America with a 31pc cut, a 30pc reduction among US explorers and a 23pc drop in budgets in Asia. Global integrated oil companies are cutting by 15pc on average.

Goldman sees further downside risks to its supply forecasts because the response from producers "has been, at the margin, more aggressive than our expectations at the start of the year."

Exploration spending and activity in mature offshore basins will bear the brunt of the capex cuts and are unlikely to recover soon, unlike the US onshore industry, even if oil markets improve. This means offshore rig rates will stay under pressure as more new builds enter the market. A total of 62 new jackup rigs will exit shipyards in 2015, with only four under contract. In 2016, 51 rigs are likely to enter the market with only seven under contract. In 2015, 30 floater rigs are expected, with only 15 under contract, and 22 in 2016 with only 12 under contract.

mg/tdf

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