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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 | [email protected]
...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 | [email protected] Gabriel Lipton Galbraith | [email protected]
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
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-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
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Germany France Italy Spain UK
Announced QE (APP + PEPP) 2020 Deficit (GS forecast)
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35%
40%
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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
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0
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01861
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2020
US
recessi
on
Cru
de o
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01
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arr
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19
73
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eq
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OP
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+
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tem
th
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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%
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2010 2012 2013 2015 2016 2018 2020
Caa HY
0.00
0.05
0.10
0.15
0.20
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0.35
0.40
2006 2008 2010 2012 2014 2016 2018 2020
BBB IG
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Disclosure Appendix
