Goldman: Saudis Wrong to Rule Out US Shale Rebound

Saudi Arabia is wrong to think that US shale production will not respond to higher oil prices in 2017, according to Goldman Sachs Group Inc.

While crude may rise to over $60 a barrel if OPEC members and other nations cut production as promised, a rebound in US shale output would bring prices back to $55, the bank’s forecast for the first half of next year, it said in a report, Bloomberg reported.

Goldman's warning comes after Saudi Energy Minister Khalid al-Falih said on Saturday he did not expect a big supply response from American shale producers in 2017.

With nations including Russia joining an OPEC pledge to reduce output, and Saudi Arabia surprising the market by saying it will cut more than previously agreed, analysts say oil may climb to $60 a barrel for the first time in almost a year and a half.

But the planned reductions exclude producers such as the US and Canada, which have benefited from a shale boom. The number of active rigs drilling for crude in America has already climbed to the highest since January.

“Greater than expected compliance to the announced cuts, or Saudi’s willingness to cut production further are two upside risks to our forecasts,” Goldman analysts said in a Dec. 11 report. “We disagree however with Saturday’s comment by Saudi energy minister that shale would not respond in 2017.”

At the current US horizontal oil-rig count, shale output is already on track to sequentially grow from the first quarter of 2017, according to Goldman.

American producers can achieve 800,000 barrels a day of annual production growth at a price of $55 a barrel for benchmark West Texas Intermediate crude, “with limited outspend of cash flow and declining leverage,” the bank said.