Energy Update December 2014
Today I was on call with the Goldman Sachs’ Energy team and the following are some takeaways from the discussion:
- From its peak on June 20th, WTI oil has fallen 41%. In previous rolling 172 days since 1983 such price change was only exceeded three times
- In the last two years, supply increases from the US were matched by global disruptions. Since June of this year that offsetting dynamic failed (however, today we learned that Libya shut down close to 300,000 barrel a day in production due to rebels seizure of one facility)
- Demand for oil is still growing albeit more slowly. In my view, this could change quickly in 2015, as the economy might very well surprise to the upside.
- Goldman Sachs’s central case for 2015 is an oil range between $65-$85 after a period of adjustment in supply (most likely a slowdown in US shale production)
- A significant portion of shale production does not generate an attractive return below $70-$80 oil; however, it is believed most production will remain on line even in the $50-$60 range
- 5 year oil futures contracts provide a proxy for the economics of steady-state oil production of around $70-$80
- Panic trading has increased correlations of MLPs to oil but longer term such correlations are relatively low
- Distribution growth in the MLP space has remained very resilient over the years regardless of oil volatility and recessions. In fact, since 1996, distributions for the aggregate sector were always positive, ranging from 2% to over 10%