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$50 Oil For 15 Years – Can Anyone Take Goldman Seriously Anymore?

In view of difficulties mainy oil companies are running into Goldman's attention-grabbing announcements are an increasingly hard sell

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An excerpt from an article that originally appeared at Oil Price


The Federal Reserve decided to leave interest rates unchanged, a move that had become increasingly expected as the Fed meeting drew closer, due to low inflation and concerns over instability in global financial and currency markets. Federal Reserve Chairwoman Janet Yellen said that “heightened uncertainties abroad” convinced the board to wait before raising interest rates. A rate hike is still likely before the end of the year, but probably no more than 0.25 percent. The Fed cited strong consumer demand, solid job gains, declining unemployment – all reasons that a rate increase is likely sometime soon. When that increase does occur, it will be the first increase in almost a decade. Crude oil prices barely budged on the news, trading slightly down.

Meanwhile, Goldman Sachs continues to roll out bearish predictions for oil prices. The latest from the investment bank is that oil prices could remain low for 15 years. Goldman made headlines recently when it outlined a scenario in which oil prices would drop to $20 per barrel. Now the bank is outdoing itself with a prediction that oil will remain around $50 per barrel though 2030. For evidence, it points to the bust of the 1980s when oil prices did not rebound until the turn of the century.

Goldman gets a lot of attention with these types of headline-grabbing figures, but they seem to be off base on this one. The EIA has confirmed that U.S. oil production is declining, already down 500,000 barrels per day since peaking earlier this spring at 9.6 million barrels per day. At the same time, demand is rising. Throw in some other major sources of expected growth in oil production that won’t pan out – a few million barrels per day of capacity that were expected from both Iraq and Brazil can probably be ruled out – and there is a recipe for a rather strong rebound in oil prices in the coming years. Obviously, the big question is when that will happen. The glut could persist through this year and next, but calling for oil to remain near $50 per barrel for 15 years seems like a stretch.

Moody’s Investors Service says that the world’s largest oil companies will continue to see their balance sheets take a hit. Over the course of 2015, the oil majors will see cash flow decline by 20 percent, the ratings agency says. That will result in negative free cash flow of nearly $80 billion this year, and the agency reaffirmed its “negative” outlook for the industry. Dividends appear to be safe for now, but that strategy will likely require further asset sales and cuts in capital spending programs.st).

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