Oil Price to Slide to $45 in 2018

Nothing is certain in the world of oil, but clouds appear to be gathering on the horizon

Stephen Simko, CFA 23 February, 2017 | 8:39AM
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OPEC's production cuts and strong demand growth have 2017 crude fundamentals in their best shape since oil prices crashed two years ago. The consensus outlook is that fundamentals are now strong enough to remain healthy even after OPEC's cuts lapse. This might have been possible a few months ago, but the odds of this scenario playing out have markedly worsened since.

We our maintaining our forecast for strong oil prices in 2017, averaging $58 per barrel

The reason is that major increases in shale activity now have U.S. production firmly on a path of rapid growth, even if rig counts don't increase further. This growth plus the eventual supply increases from OPEC is likely more than enough to erase any market tightness and throw crude markets back into oversupply.

What's obvious by now is that current oil prices provide economics that are very attractive to the major U.S. shale producers. This has created the conditions that will allow tight oil to grow rapidly and is a reality that even looming cost inflation will not change. Unless shale produce rs become more disciplined or OPEC resigns itself to permanently ceding share to the U.S., oil markets have major problems looming. Neither of these is likely to occur.

Nonetheless, there remains a good chance that oil prices could rise in the coming months if OPEC compliance remains high or production cuts are extended. Because surging shale output won't truly begin to move the supply needle until the second half of the year, these would allow for further inventory draws.

This could bolster the perception that oil market fundamentals are improving. In reality, oil prices above current levels at any point in the coming months would in fact be pouring gasoline on the flames since it would certainly encourage even higher levels of U.S. shale investment. Nothing is certain in the world of oil, but clouds appear to be gathering on the horizon. We our maintaining our forecast for strong oil prices in 2017, with West Texas Intermediate averaging $58 per barrel, followed by a meaningful pullback to $45 in 2018.

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

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