Oil Price to Fall Below $50 Next Year, Analysts Say

Rising US shale production is key to Morningstar analysts' bearish 2018 oil price outlook, despite cuts from OPEC

Jeffrey Stafford, CFA 21 December, 2017 | 8:07AM David Meats
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Iraqi oil worker

Morningstar analysts' 2018 forecast for US crude oil is $48.75 a barrel, which would be a 15% decline from current levels. Several months of stagnating shale oil growth, as well as the impact of this year's hurricanes, have lulled oil markets into a false sense of security as prices have rise towards $60 a barrel. Exactly how far prices could fall amid growing US production is hard to forecast, but it's clear the market is underestimating the trouble crude prices could see in 2018.

Rising US Output Hits OPEC Efforts

At the end of November, oil cartel OPEC said at its Vienna meeting that it will extend its 1.8 million barrels a day production cuts to the end of 2018, rather than just to the end of March next year.

This year, with the cuts in place, the cartel has made significant progress bringing global oil stocks back to historic averages.

But it’s taking more time than initially anticipated, which explains the extension. In 2018 we think OPEC’s efforts will be hampered by increasing US shale production, increasing production from the few OPEC members that haven't been bound by quotas, and wavering compliance with the quotas by other members. The impact of these cuts will fall short of what the cartel and its partners are hoping for.

Without deeper cuts, we don’t think OPEC will achieve its stated goal of bringing oil stocks back to normal levels in 2018. In fact, we forecast global oil levels will start increasing again in 2018. Even in a scenario where OPEC countries' compliance with quotas is perfect, global stocks would probably still increase in 2018.

The Outlook for 2018 and Beyond

The inevitable resumption of oil output growth in the United States, coupled with expansion in Libya and Nigeria, will probably nudge crude oil stockpiles higher again in 2018, whether other OPEC members comply with fully agreed production targets or not.

We think US production will rise materially in 2018 and beyond. Our medium-term forecast is for $55 a barrel of West Texas Intermediate.

The latest monthly US crude production data released by the US energy body, the EIA, gives us confidence that our thesis for surging US production is playing out. The US produced 9.48 million barrels a day in September, a more than 3% increase from the previous month and a nearly 11% year-on-year rise.

Looking past 2018, we forecast that US crude production will see a 5% annual growth rate from 2016 to 2020. We expect most of the growth in our forecast to come from Texas and New Mexico.

Compliance with OPEC production cuts has been uncharacteristically strong so far, thanks in large part to Saudi Arabia. Still, about half of the countries participating in the agreement are producing above their quotas, to balance budgets, to fund social programmes and fuel subsidies for drivers and companies. 

Overall, we expect OPEC production to grow 120,000 barrels per day from the third quarter of 2017 to the fourth quarter of 2018.

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Jeffrey Stafford, CFA  Jeffrey Stafford, CFA, is an equity analyst for Morningstar, covering agriculture and chemical companies.