Energy: No Rapid Rebound for Oil Prices

The rapid decline in oil prices has created significant investment opportunities, but downside risk remains in the short term, says Morningstar equity analyst David Meats

Morningstar Equity Analysts 30 June, 2015 | 2:19PM

The United States has rapidly become the critical source of incremental supply for global oil markets, and growth has come overwhelmingly from unconventional drilling. The large increases in U.S. output did not upset global supply/demand balances over the past few years, largely because significant amounts of supply were disrupted by political/security issues in Libya and Iran, for example. But in 2014 the scales finally tipped: combined with weakening demand and OPEC's decision not to reduce its own production, major supply imbalances resulted that, as of today, have yet to dissipate.

In the current market environment of high costs and low oil prices, upstream firms face extremely challenged economics where new investment is not value-creative. Such conditions are not sustainable over the long term, however, and we expect the combination of rising oil prices and falling costs to provide significant relief in the coming years.

Despite our belief that tight oil has considerable running room from here, it can't completely meet future global demand. The marginal barrel, therefore, will come from higher up the global cost curve. Our forecasts show that higher-quality deep-water projects will be the highest-cost source of supply needed during the rest of the decade. As a result of this meaningful move down the cost curve, our mid-cycle oil price forecast for Brent is $75 per barrel, meaningfully below 2014 highs.

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Morningstar Equity Analysts  Morningstar stock and fund analysts cover 2,000 mutual funds, 2,100 equities, and 300 exchange-traded funds.

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