A senior Goldman Sachs analyst recently argued that the changes to the oil market which have produced the recent fall in oil prices constitute a fundamentally new paradigm.
Jeff Currie, head of Commodities Research for Global Investment Research, calls this “The New Oil Order” – but argues that the changes leaves oil and gas producers many options.
Expanding on this, he says: ”Oil and gas producers have a lot of options. They can lower costs, grow volumes, sell shares, sell equity, or increase their liquidity and wait until someone with deeper pockets buys them out.
Currie also argues that the drop in oil prices is “good deflation” and “technologically and supply driven”. He says: “We are witnessing a market cycle similar to what we witnessed in the mid-1980s, and there are real economic reasons why.”
After a decade-long “investment phase” that helped unleash the shale revolution, oil is seeking a new equilibrium between supply and demand, he says. It is because the market has now entered an “exploitation phase” that downward pressure has been applied to prices.
Worldwide oil demand has changed dramatically, but is still growing. Where previously the US was the marginal consumer, this role is now filled by China and India and the emerging market countries. Previously the US was an oil importer but now its increased oil production, based on shale, has been a key factor in the recent global oil price fall.
Currie points out that in terms of supply, shale oil has turned oil production into “a standard manufacturing process”, which means that production can be “dialled-up or dialled-down in very short order”, which reduces volatility.
Because the supply curve is now very flat, this means that whatever action the OPEC producers’ organisation takes produces much less impact. Shale has deprived the cartel of much of its influence, Currie says.