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.
He explained that U.S. shale production was slowing – Baker Hughes data on Friday confirmed that the oil rig count fell for a seventh consecutive week. He also said that two of the big engines of production growth – Iraq and Saudi Arabia – would “probably” see also slower growth in production.
“If we look forwards, 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 ten years?’,” he said.