Oil Fundamentals Changing: Goldman Sachs

Oil Fundamentals Changing: Goldman SachsOil Fundamentals Changing: Goldman Sachs

The battered and bruised oil industry could see some upside in the medium term if it sticks with its period of cost cutting, according to Michele Della Vigna, co-head of European Equity Research at Goldman Sachs.

"Sentiment is changing," he told CNBC Monday. His team of research analysts closed its "underweight" rating on the European integrated oils sector last month. But, Della Vigna argued that fundamentals were also changing alongside investors' outlook.

"On the oil price, yes, we do still expect six to nine difficult months as we need to digest this oversupply. But, longer term, we start to see some adjustment mechanisms coming into place," he said.

Della Vigna explained that US shale production was slowing, as Baker Hughes data on Friday confirmed that the oil rig count fell for a seventh consecutive week. He also said two of the big engines of production growth, Iraq and Saudi Arabia, would "probably" see slower growth in production.

"If we look forward, the key thing will be: 'Can Big Oil cut costs substantially, improve capital efficiencies, so that they rebuild their free cash flow which has been eroded in the last 10 years?'," he said.

The price of oil has collapsed from near $120 a barrel in June last year to lows of around $40 in August. Both Brent and WTI crude have since bounced back with the latter trading at $46.90 a barrel on Monday morning.

Major oil producers in Europe and the US have been busy with restructuring and cost-cutting since oil's dramatic fall began in mid-June last year. It has not stopped yet, however, with France's Total announcing a deal to sell a 15% stake in a Norwegian oilfield on Monday.

Bob Parker, a senior advisor at Credit Suisse, told CNBC on Monday that it was now a "cost-cutting" industry and predicted that earnings will simply be driven by consolidation.

Free cash flow and a potential dividend for shareholders can only be sustainable if the sector cuts operational and capital expenditure by 30-40%, Della Vigna added.

The dramatic fall in prices was due to weak demand, a strong dollar and booming US oil production, according to the International Energy Agency.

However, the Organization of Petroleum Exporting Countries' reluctance to cut output has also been seen as a key reason behind the fall.