Oil Price Likely to Rally in 2018

Morningstar analysts have raised their price forecast for oil to $65 a barrel as fundamentals post 2017 are looking particularly bullish for prices

Stephen Simko, CFA 22 September, 2016 | 2:40PM
Facebook Twitter LinkedIn

Strong demand growth and supply issues have pulled forward the oil price recovery by about a year relative to our previous outlook. Fundamentals after 2017 are looking particularly bullish for prices, and an oil price rally in 2018 is looking more and more likely. We’ve raised our 2018 forecast to $65 per barrel.

Even so, the strength of U.S. shale is lurking beneath the surface. Our analysis shows that the recent uptick in rigs and falling shale decline rates together are enough to stabilise U.S. crude production within six months. If activity isn’t scaled back, U.S. production will begin growing in 2017, albeit barely.

This highlights the strength of the U.S. oil market: Should the oil price begin to rise, the industry strong enough to eventually snuff out any future price rally. We remain bearish on oil prices longer term, and we reiterate our mid-cycle oil price outlook of $60 a barrel for Brent crude oil.

Oil Market Fundamentals Look Far Stronger by 2018

Assuming U.S. shale activity doesn’t materially increase in the coming months, much stronger crude market fundamentals look likely to emerge in 2018. If U.S. tight oil activity remains at current levels, supply will begin to fall well short of demand, a dynamic that will only intensify in 2019.

The root cause of the looming supply shortages in the medium term is the major cutbacks to upstream capital expenditure during the past two years. As a result of low investment levels, new capacity additions outside of shale are about to fall dramatically after 2017, a situation that is now unavoidable because of the long lead times associated with these projects. At the same time, OPEC will have little, if any, usable spare capacity, as the cartel has also been cutting back on oil field spending in response to low oil prices.

The industry is thus setting itself up to have few options to meet incremental supply needs besides U.S. shale by 2018-2019. Although tight oil rig counts have recently risen as crude prices have recovered, we nonetheless believe oil prices are likely to strongly rally at least in the medium term.

The looming supply shortages are likely to require much greater increases in industry investment to meet demand than have recently occurred, and we are sceptical about whether these will be possible without a very strong signal from commodity markets.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Stephen Simko, CFA  is a senior stock analyst at Morningstar.

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures