Goldman Sachs says oil may fall below its US$39 a barrel target

[NEW YORK] Goldman Sachs Group Inc said US crude oil may fall below bank's six-month forecast of US$39 a barrel and future rallies could be thwarted by the speed at which any lost shale output can recover.

"You can always undershoot to the downside," Jeff Currie, Goldman's head of commodities research, said in an interview on Bloomberg Television's "Surveillance."

The forecast of lower prices was based in part on the bank's estimates for default rates among the most-indebted US producers, he said.

Goldman Sachs cut oil projections in a report on Jan 11, estimating that West Texas Intermediate, the US benchmark, will trade at US$39 a barrel in six months' time, as Opec's unwillingness to tackle a global surplus leaves prices seeking a new equilibrium. WTI settled at US$45.89 a barrel on Tuesday, its lowest since March 2009.

The speed at which investment can return to shale output is hurting prospects for a price recovery, Mr Currie said today.

"Shale has fundamentally changed this market," he said. "The lead time between when you put money in the ground and when you get production has collapsed from three-to-four years, all the way down to 30 days."

Oil probably wouldn't recover even if the Organization of Petroleum Exporting Countries cut production because such a measure would encourage investment in shale projects, he said. The 12-nation group decided on Nov 27 to keep pumping at 30 million barrels a day. WTI dropped 37 per cent since then.

BLOOMBERG