View
8
Download
0
Category
Preview:
Citation preview
OIL’S SEISMIC SHOCK
ISSUE 88 | March 31, 2020 | 8:00 PM ESTEquityResearchGlobal Macro Research
Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.
The Goldman Sachs Group, Inc.
The global oil market is experiencing a massive demand shock, with demand for transportation fuels sitting in the crosshairs of the coronacrisis. At the same time, major oil producers have engaged in a war for oil market share, resulting in a sizable supply shock. The impact of these simultaneous shocks on oil prices, OPEC+, the oil industry, and credit and financial markets more broadly are Top of Mind. We feature interviews with three energy experts, Pulitzer Prize-winning author, Daniel Yergin, PIRA Energy Group Founder, Gary Ross, and our own head of Global Commodities Research, Jeff Currie. They discuss the enormity of the current oil shock, how we got here, and what’s in store—namely, sharply lower, and even negative, crude oil
prices as oil infrastructure is overwhelmed by the supply surge. But they also argue that the sharper the price decline, the sharper the eventual rebound as oil production is shut in. We conclude that all of this will lead to a healthier global oil industry. And we discuss why this will be painful for credit markets, but likely won’t pose systemic risk.
When you step back, recent developments are a... culmination of an unsustainable supply management strategy that is coinciding with an enormous demand shock, and the answer has to be low prices.
- Gary Ross
“Something has to give here because the world oil industry is going to run out of storage space and that’s going to be a very serious issue for everybody.
- Daniel Yergin
“
INTERVIEWS WITH:
Daniel Yergin, Vice Chairman, IHS Markit
Gary Ross, CEO, Black Gold Investors; Founder, PIRA Energy Group
Jeff Currie, Global Head of Commodities Research, Goldman Sachs
OIL’S VIOLENT REBALANCING BENEFITS SHALE Damien Courvalin, GS Commodities Research
US SHALE: DOWN BUT NOT OUT Brian Singer, GS Energy Equity Research
OIL: ANOTHER HEADWIND TO CREDIT MARKETS Amanda Lynam, GS Credit Strategy Research
RUSSIA: KEEPING THE FORTRESS SAFE Clemens Grafe, GS CEEMEA Economics Research
SAUDI: HOW LONG CAN IT STAY THE COURSE? Farouk Soussa, GS CEEMEA Economics Research
WHAT’S INSIDE
of
Allison Nathan | allison.nathan@gs.com
...AND MORE
Paradoxically, the demand shock could ultimately create an inflationary oil supply shock of historic proportions because so much oil production will be forced to be shut in.
- Jeff Currie
TOP MIND
Jenny Grimberg | jenny.grimberg@gs.com Gabriel Lipton Galbraith | gabe.liptongalbraith@gs.com
Note: The following is a redacted version of the original report published March 31, 2020 [22 pgs].
Q1 Q2 Q3 Q4 Q1 Q2
2020 2021
-50
-40
-30
-20
-10
0
10
20
30
New GS US Forecast
* Includes cutbacks to consumption categories requiring face-to-face interaction** Includes reduced domestic and foreign demand for goods, supply chain disruptions, and plant shutdowns.*** Includes cutbacks to structures investment, homebuilding, and home sales.
Previous Forecast
Services Consumption Effects*Manufacturing Effects**Construction Effects***Second-Round Income EffectsFiscal Response to Virus
0
0.5
1
1.5
2
Q4 2020Q1 Q2 Q3 Q4
Hypothetical No-Virus Case
New Forecast
2019Q4
0
50
100
150
200
250
300
0
50
100
150
200
250
Germany France Italy Spain UK
Announced QE (APP + PEPP) 2020 Deficit (GS forecast)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
EMBI Weighted
Equal Weighted
Oil prices have collapsed to cash costs Global oil prices by type, Dollars
0
20
40
60
80
Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20
Bakken MidlandLLS MarsWCS Hardisty WTSWTI Brent
0
20
40
60
80
10
0
12
0
14
01861
1864
1867
1870
1873
1876
1879
1882
1885
1888
1891
1894
1897
1900
1903
1906
1909
1912
1915
1918
1921
1924
1927
1930
1933
1936
1939
1942
1945
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
US
recessi
on
Cru
de o
il pri
ces, $2
01
4/b
arr
el
19
73
-19
74
Ara
b s
tate
s in
stitu
te
em
ba
rgo
ag
ain
st
co
un
trie
s s
up
po
rtin
g
Isra
eli
n th
e Y
om
K
ipp
urW
ar
18
62
-18
65
US
Civ
il W
ar
dri
ves
up
co
mm
od
ity
pri
ce
s; t
ax
on
co
mp
etin
g il
lum
ina
nt
rais
es
de
man
d fo
r o
il
18
90
-18
92
Re
ce
ss
ion
an
d s
tro
ng
pro
du
ctio
n fro
m
US
an
d R
us
sia
bri
ng
pri
ce
s d
ow
n
18
94
Ch
ole
rae
pid
em
ic c
uts
p
rod
uctio
n in
Ba
ku
, A
zerb
aija
n, co
ntr
ibu
tin
g
to 1
89
5 s
pik
e
19
20
Ra
pid
ad
op
tio
n o
f th
e
au
tom
ob
ile
dra
stica
lly
rais
es
oil c
on
su
mptio
n,
lea
din
g to
the
"W
es
t C
oa
st G
as
olin
e F
am
ine"
19
31
Pri
ce
s h
it r
eco
rd lo
w
as
on
se
t of G
rea
t D
ep
res
sio
n re
du
ce
s
de
ma
nd
19
56
-19
57
Su
ez
cri
sis
take
s 1
0%
o
f w
orl
d's
oil o
ff t
he
m
ark
et, b
ut
pro
du
ctio
n o
uts
ide
of
the
Mid
dle
Ea
st
sty
mie
s a
pri
ce
sp
ike
in
th
e in
teri
m
19
78
-19
79
Ira
n c
uts
pro
du
ctio
n a
nd
e
xpo
rts
du
rin
g re
volu
tio
n,
ca
nce
ls c
on
tra
cts
with
US
co
mp
an
ies
19
80
Ira
n-I
raq
Wa
r b
eg
ins
; e
xpo
rts
fro
m th
e r
eg
ion
s
low
furt
he
r
19
90
Ira
q
inva
de
sK
uw
ait;
Ku
wa
iti
exp
ort
s
cu
t u
ntil
19
94
19
98
As
ian
d
em
an
d
co
lla
ps
e a
fte
r 1
99
7cri
sis
co
mb
ine
d
with
gro
win
g
su
pp
ly
Ea
rly 2
00
0s
Pro
du
ctio
n
falls
du
e to
la
ck o
f in
ves
tme
nt
19
80
sD
em
an
dre
sp
on
se
to s
up
ply
s
ho
cks
p
us
he
s
pri
ce
s
do
wn
20
08
Glo
ba
l F
ina
ncia
l C
ris
is
20
11
Ara
bS
pri
ng
; L
ibya
n c
ivil w
ar
dis
rup
ts o
utp
ut
Mid
-20
00
sA
sia
dri
ves
ri
sin
g d
em
an
d
as
pro
du
ctio
n
sta
gn
ate
s a
nd
Sa
ud
i sp
are
ca
pa
city
de
clin
es
18
65
-18
90
Pri
ce
sb
oo
m
an
d b
us
t with
flu
ctu
atio
ns
in
US
dri
llin
g
19
47
Po
st-
wa
r a
uto
mo
tive
bo
om
cre
ate
s fu
el
sh
ort
ag
es
in s
om
e
US
sta
tes
19
88
Ira
n,Ir
aq
in
cre
as
e
ou
tpu
t w
ith
e
nd
of
wa
r
19
85
-19
86
Sa
ud
i A
rab
ia
incre
as
es
pro
du
ctio
n
to r
eg
ain
m
ark
et
sh
are
20
01
-20
03
9/1
1 a
nd
inva
sio
n o
f Ir
aq
ra
ise
co
nce
rns
ab
ou
t Mid
dle
Ea
st
sta
bility;
Ve
ne
zue
lan
oil
wo
rke
rs s
trik
e
18
91
-18
94
Pe
nn
syl
van
ia o
ilfie
lds
b
eg
in to
de
clin
e,
se
ttin
g th
e s
tag
e fo
r h
igh
erp
rice
s in
18
95
Ma
rch
20
20
C
oro
na
viru
s-
rela
ted
d
em
an
ds
ho
ck a
nd
co
lla
ps
e in
O
PE
C+
a
gre
em
en
t le
ad
to p
rice
co
lla
ps
e
20
14
-20
15
Glo
ba
l ove
rsu
pp
ly le
ave
s
oil m
ark
ets
se
arc
hin
g fo
r n
ew
eq
uilib
riu
m 20
17
-20
20
OP
EC
+
cu
ts
pro
du
ctio
n
tos
tem
th
e d
ecline
in
oil
pri
ce
s
ca
us
ed
by
glo
ba
l o
vers
up
ply
Price volatility spikes as oil nears inventory constraints
Natural gas wells already demonstrate shale’s flexibility Av. mon. gas production for shut-in wells in Alipine High shale play, mmcf/d
0
50
100
150
200
-10% -5% 0% 5% 10% 15%
Global Financial Crisis
Normal
1st Gulf War
Sep 11 aftermath
Asian Financial Crisis30-Mar-2020
0
2
4
6
8
10
12
14
16
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Months since initial production
Russia's budget breakeven has fallen sharply below $50/bbl Fiscal breakeven, '17 USD (lhs); budget balance at $40/bbl, % of GDP (rhs)
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
0
20
40
60
80
100
120
140
06 07 09 10 11 12 13 14 15 16 17 18 19 20
fiscal oil breakeven in 2017 US dollars (lhs)
budget balance at USD40/bbl in 2017 US dollars
(% of GDP, rhs)
Net debt will rise sharply under the worst case scenario… Net debt/GDP, %
...and reserves will fall rapidly Months of imports
0%
10%
20%
30%
40%
50%
60%
Base case Downside Worst Case
2019 2020 2021 2022
0
5
10
15
20
25
30
35
Base case Downside Worst Case
2019 2020 2021 2022
Upstream valuations have moved to levels of historical pre-
shale troughs — around 50 cents per Dollar invested EV/gross cash invested adj. for shifts in 5-yr avg. cash return on cash inv.
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1995 1998 2001 2004 2007 2010 2013 2016 2019
HY Energy default rates may surpass 2015 peak 12-month trailing default rate for CCC and HY-rated Energy issuers, %
Fallen angel downgrade risk skewed to the upside relative to 2015-16 12-month trailing transition rate to HY for the Oil & Gas sector, %
0%
10%
20%
30%
40%
50%
60%
2010 2012 2013 2015 2016 2018 2020
Caa HY
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
2006 2008 2010 2012 2014 2016 2018 2020
BBB IG
..
RU
SS
IAN
OR
WA
YC
AN
AD
A
ME
XIC
O VE
NE
ZU
ELA
NIG
ER
IA
SA
UD
I A
RA
BIA
US
BR
AZIL
UK
JAP
AN
IND
IA
CH
INA
TU
RK
EY
GE
RM
AN
Y
UA
E
Disclosure Appendix
Recommended