The global oversupply of oil is worse than expected and it could take oil prices as low as $20 U.S. to clear the glut, investment bank Goldman Sachs said Friday.
While that would mean lower energy prices for consumers, it would mean even more pain in the oilsands. At those prices, not only would no new oilsands projects come online, but many existing ones would be operating at a large loss. An estimate from TD Securities last month found three-quarters of Canadian oil operations are already operating at a loss, at current prices.
The $20 estimate isn’t Goldman’s target oil price. It’s predicting that West Texas Intermediate -- the benchmark that Canadian oil prices follow -- will hover around $45 next year, down from an earlier estimate of $57. But prices could come down to $20 if production cuts don’t happen quickly enough, the bank said.
“The oil market is even more oversupplied than we had expected and we now forecast this surplus to persist in 2016,” Goldman analysts wrote, as quoted at the Daily Telegraph. “We continue to view U.S. shale as the likely near-term source of supply adjustment.”
The U.S.’s shale oil fields are considered likelier to shut down than oilsands facilities because of the high costs involved in stopping and restarting an oilsands mine. Many oilsands operations continue to produce for this reason.
TD Securities estimated last month that the most efficient oilsands operations need U.S. crude prices to be above $43 to turn a profit. West Texas Intermediate was trading at $44.79 as of Friday morning.
But a new forecast from the International Energy Agency suggests the production drop Goldman Sachs is looking for could soon be underway. Overall oil supply from non-OPEC countries could be headed for the biggest drop in more than two decades due to lower prices, but Canada's output is expected to rise, the agency said in a report Friday.
The report said non-OPEC production is expected to drop nearly half a million barrels per day to 57.7 million barrels a day.
"If it materializes, the decline in output would be the largest since 1992 — and the collapse of the former Soviet Union — when non-OPEC supplies contracted by (one million barrels per day) from the previous year," the report said.
It said OPEC supply remains higher than last year, but declines in Saudi Arabia, Iraq and Angola pushed OPEC crude supply down in August to 31.6 million barrels a day.
The IEA forecasts Canadian oil output will average 4.46 million bpd in 2016, up from 4.31 bpd in 2015 and 4.27 bpd in 2014.
By contrast, U.S. production is expected to drop to 12.53 million in 2016 from 12.72 in 2015. At that level, next year's U.S. production would still be above 11.96 million bpd in 2014.
The agency forecast growth in oil demand this year and a slight drop next year.
That prompted the Economist Intelligence Unit to predict higher oil prices next year, rather than lower.
— Robin Bew (@RobinBew) September 11, 2015
-- With files from The Associated Press and The Canadian Press