GOLDMAN: Oil prices need to fall a lot lower for the market to get to the equilibrium it needs

However, actual oil production has yet to fall as the active rigs are substantially more efficient and cost-effective.

As such, Goldman Sachs analysts are convinced prices will go a lot lower, and will need to stay low in order to get to the point where rig shutdowns lead to a significant pull back in production. From Goldman:

While US [exploration and production companies] are indicating a greater focus on reducing capex and balancing capex and cash flow, we expect that lower prices will be required in order for the capex guidance and rig cuts to materialize into sufficiently lower US production growth given: (1) we expect high-grading to become more apparent, translating into more production per rig in the most efficient counties, (2) the current rig decline can reverse given flexibility in cutting and bringing back non-contracted rigs (at a lower cost and with hedging), and (3) rising uncompleted well backlog leaves risk to our bottom-up production growth estimate as skewed to the upside at higher prices and into 2016. Finally, our larger cost deflation expectation vs. company guidance also leaves risk to production growth as skewed to the upside for the same capex/cash flow financial balance.

To reiterate, 1) production is becoming more efficient, and 2) even though US oil producers have pulled back on investment as prices have plunged, they all seem to have their finger on the trigger to get things going again.

Therefore, prices need to stay low or keep going lower in order for producers to really be discouraged. In the second of the two charts above, you can see the "war chest" of uncompleted wells that's building. There's a huge fleet ready and waiting to start pumping.

Goldman thinks the rig count needs to keep dropping. WAY down. Down to 2009 levels (see the above chart). But that might not happen, and here's why:

This desire to ramp up activity is not only visible through comments on earning calls and a focus on building an uncompleted well war chest, but also through the significant equity issuance that has occurred over the past month. With E&Ps focusing on reducing leverage and the equity market showing strong appetite for these issuances, producers will be better positioned to deliver strong production growth later this year and into 2016, undermining the market rebalancing. While we believe shale is ultimately the solution to meeting demand growth medium term, production growth still has to be throttled back in the near term.

By reducing leverage and shifting toward a more equity-heavy capital structure, these companies give themselves some financial flexibility as the lower interest expenses mean they can operate at thinner margins without an increased risk of defaulting on debt.