In mid-January, Goldman Sachs Research upgraded to “Overweight” its oil outlook for 2017. Goldman’s head of commodities research, Jeff Currie, emphasized in the report that the firm based its positive outlook on anticipated higher demand—due to “where we are in the business cycle”—rather than OPEC’s announced production cut of last November or visions of vastly higher prices. He said the current cycle indicates a medium- to long-term market rebalancing.

“When commodity demand is above commodity supply, deficits result, inventories are drawn down and scarcity premiums begin to arise—and that’s what’s driving our bullish expectations on commodity returns,” Currie said.

He expects oil to trade marginally higher as inventories normalize, but to remain bound by low-cost shale production that’s defined a “new world order” where shale is the dominant resource base.

Goldman forecast that oil will sit in a range of $55 per barrel (bbl) to $60/bbl for 2017. Shale holds down oil prices because its cost basis is now known, unlike a decade ago, Currie said. “Therefore, our expectations on returns come not from price appreciation, but rather from the scarcity premium that prices need to achieve relative to that cost basis established by shale.”

How does this analysis apply to a low-cost basin like the Denver-Julesburg in Weld County, Colo., and its Niobrara and other shale formations under development? Weld County is the oily heart of the D-J, according to a recent Bernstein Research report that examined the potential for D-J inventory to grow via downspacing.

Like several other plays, the D-J has sweet spots, but the variability of its results overall is lower. “We find a much weaker correlation between wells drilled per square mile and the IP [rate] of wells than we do in other plays,” the analysts, led by Bob Brackett, said.

While the D-J might not have as generous an ultimate inventory of wells, “the inventory mostly breaks even below $60 per barrel, and the cost curve is flatter than elsewhere,” the report noted. Thus, the D-J can work at current oil prices.

This venerable basin has a bright future. The analysts think that if activity returns from the current 20 rigs in early February to 50 by 2020, the D-J could achieve new production heights of 400 Mbbl/d. That would register as 100 M more than its previous peak, and about 150 M more than the lows of early 2017. They note that Bakken and Eagle Ford production will not be able to recapture their former high points within that time frame.

According to Bernstein’s report, some 4,000 locations remain that can break even below $50/bbl. Assuming 12 wells per square mile (50-acre spacing), the Bernstein analysts identified 16,000 remaining locations “that rise in single-well breakeven price from about $30 toward $90 per barrel. The basin has significant low-cost inventory remaining, however, “with about nine years’ worth that breaks even below $60.” That tally figures on about 900 wells drilled per year, which was the average from 2012 to 2015.

At 80-acre spacing, the report forecasts about five years of sub-$60/bbl inventory.

Bernstein noted that within its coverage, Noble Energy Inc. (NYSE: NBL) and Anadarko Petroleum Corp. (NYSE: APC) are the most favorably exposed. Bill Barrett Corp. (NYSE: BBG) and newly public Extraction Oil & Gas are also levered to the D-J, as are private operators Bonanza Creek, Fifth Creek, Crestone Peak, Synergy Resources, and Great Western—all of which could be takeout candidates for larger companies wishing to consolidate, the analysts said. Carrizo Oil & Gas Inc. (NASDAQ: CRZO), PDC Energy Inc. (NASDAQ: PDCE) and Whiting Petroleum Corp. (NYSE: WLL) also have stakes, but the basin is generally farther down on their lists of priorities.

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