What Next for the Oil Price and Energy Stocks?

Oil prices above current levels at any point in the coming months would encourage even higher levels of U.S. shale investment and production

Morningstar Equity Analysts 7 July, 2017 | 11:58AM

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 market fundamentals are now strong enough to remain healthy even after OPEC returns to higher production.

This might have been possible a few months ago, but the odds of this scenario playing out have since markedly worsened. The reason is that the major increases in shale activity now have U.S. oil production firmly on a path toward rapid growth, even if shale rig counts don't increase from current levels. This growth--plus the eventual production increases from OPEC--is likely to erase any market tightness and throw crude markets back into oversupply within the next six to 18 months.

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 forthcoming cost inflation will not change. Unless shale producers become more disciplined or OPEC resigns itself to permanently ceding market share to U.S. producers--neither of which is likely to occur--oil markets have major problems looming on the horizon.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Royal Dutch Shell PLC B898.30 GBX3.68

About Author

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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