Goldman Sachs Puts a Dagger in Oil's Heart and America Quietly Cheers

Listen closely... do you hear that sound? That quiet applause you hear on the streets of America is the cheering of investment bank Goldman Sachs, the once reviled Wall Street firm with nicknames like 'vampire squid' for its roles in the credit crisis and housing bust.

The reason the applause can be heard is that the firm is doing its part to kill oil prices. Today, Goldman slashed its 2015 forecast on WTI 18% to $74/barrel. The forecast cut has crude trading down 1.7% and below $80 per barrel (last $79.09) in early trading Monday.

Goldman Sachs believes WTI will likely average around $74b in 2015, averaging around $75/bbl in 1Q15, bottom out at $70/bbl in 2Q15 as demand softens seasonally, before picking back up in 3Q15 to $75/bbl during the domestic driving season.

The firm sees three key changes to the oil market in the coming years vs. the last few years:

1. Greater non-OPEC supply growth excluding the United States, driven in part by Brazil;
2. Flat to rising production from OPEC excluding Saudi Arabia barring further disruptions, driven largely by Iraq;
3. Greater recognition by Saudi Arabia of the role US growth is playing which may reduce its willingness to cut production if there is global oversupply without evidence of a slowing of US shale oil growth.

"With global demand growth expected to stay moderate at higher prices, we believe that on a shorter-term basis the global market cannot to support a US oil growth rate of 1.0-1.1 million bpd on track for 2015-16 without additional disruptions," Goldman's analysts said. "Over the medium to longer term while shale growth remains robust and efficiency gains continue, there is less need for prices to support production higher on the cost curve than US shale."

They believe the call on US and Saudi Arabia oil growth is increasingly the key driver of world oil prices. "We believe oil prices should increasingly depend on how much US growth can be accommodated," the said. "We believe Saudi Arabia will cut production when it is evident US shale growth will slow barring additional global disruptions. This should likely lead to the sharpest negative price impact in 1H 2015 due to the time lag of a US production response. Earlier reductions to Saudi production or global disruptions are risks to this view."

Given their lower oil view, Goldman cut ratings, estimates and price targets on a host of Oil names Monday. Goldman cut the Oil Services sector from Attractive to Cautious. Looking at specific stocks in the Oil Services sector, Goldman added OII to CL. They remove HAL from CL but maintain our Buy rating. They downgrade PTEN (CL), PES and EMES from Buy to Neutral, and downgrade BAS from Buy to Sell. They also downgrade DO from Neutral to a Sell. Goldman also cut the E&P sector to Neutral. In the E&P sector, Goldman cut EPE Neutral from Buy, LPI/PE to Sell from Neutral, and APC/CLR to Neutral from Buy. In E&P the firm keeps EOG and RRC at CL-Buy and still like shale scale winners PXD/CXO/COG.

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