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Amid the more than two-year long global oil supply glut, mostly attributed to U.S. shale oil production, and corresponding drop in oil prices of more than 60%, investment baking firm Goldman Sachs is forecasting that U.S. oil production is resilient after all, and will increase between 600,000 to 700,000 barrels per day (bpd) by the end of next year. If so, the increase would erase all of the oil production the U.S. lost over the past two-and-a-half years.
The disclosure, first reported by The Wall Street Journal, comes as OPEC and non-OPEC members are scheduled to meet this week on the sidelines of an energy conference in Algiers.
The report comes as speculation that the world’s top two oil producers, Russia and OPEC de facto leader Saudi Arabia, will likely not agree to a production freeze, at least at the Algiers meeting, in addition to markets being spooked by Iran, who seemed to downplay the significance of the meeting.
Brent fell 1.77% on Tuesday to $46.51 per barrel, while WTI futures were reportedly trading down 1.37% at $45.30 per barrel.
Though a production freeze agreement will probably not materialize in Algiers in the next few days or even at the other OPEC meetings scheduled for the rest of the year, if Goldman’s forecast is accurate, it will put even more downward pressure on prices, while adding to a supply glut that has created the worst oil market crash in at least a generation.
With the resilience of U.S. shale oil companies able to survive the price crash, both Saudi Arabia and Russia, will either have to cut back production after the beginning of the year, or see state coffers plunge even more.
The financial pain for Saudi Arabia is pungent already, while next month it will seek to raise as much as $16.5 billion in its first international bond sale to offset record budget deficits of $98 billion last year and a projected deficit of $87 billion this year.
Russia, for its part, is already pumping at post-Soviet era highs, around 11 million bpd, and is not only feeling the sting of low prices, but also prolonged Western sanctions against its energy sector,including Western oil and gas technology, over Moscow’s annexation of Crimea.
The way out for global oil markets is clear – cut production.However, if more procrastination, especially by Saudi Arabia and Russia, continues and the global supply glut is exacerbated well into the next year, adding in Goldman’s forecast, prices could easily settle in the mid $30s range or even lower. The choice is clear, cut production now or suffer even more financial pain, while watching more oil revenue slip through your fingers.