Morningstar analysts are feeling bullish on oil prices for 2017, as U.S. production growth is expected to lag any increase in rig activity by six to nine months. But once it gets rolling, shale production should start to grow briskly, which means that much softer industry fundamentals are likely to return once OPEC unwinds its production cuts.
We are raising our 2017 WTI price forecast to $60 per barrel from $50
Based on current 2017 supply and demand fundamentals, our new base case for the United States is a 500-rig scenario, in which the horizontal tight oil rig count increases 30% from today’s 380 over the next six months. Our forecasts demonstrate that U.S. shale growth can be substantial at activity levels that remain well below pre-downturn levels.
OPEC’s recently announced production cuts represent a positive near-term development for world oil markets, removing more than one million barrels per day from an oversupplied system. Even after factoring in the inevitable U.S. shale response to higher crude prices, OPEC’s cuts point to a meaningful supply deficit next year. Consequently, we are raising our 2017 West Texas Intermediate price to $60 per barrel from $50.
Improved near-term fundamentals come at a cost, however. Even a modest recovery in oil prices will encourage U.S. shale producers to further ramp activity so that they eventually replace almost all “removed” OPEC barrels with their own. Increased near-term shale activity means that oil prices are unlikely to remain elevated for long. The industry is awash in low-cost oil, and temporary OPEC cuts cannot alter this reality. Our long-term oil price assumption of $55 per barrel WTI is unchanged.
Sharp curtailments in oil-directed drilling activity could reduce U.S. natural gas production growth in the near term, but the wealth of low-cost inventory in areas like the Marcellus and Utica ultimately points to continued growth through the end of this decade and beyond.
Based on a more optimistic outlook for low-cost production—primarily as a result of slowing declines in associated gas volumes, as well as improved productivity and resource potential from the Marcellus and Utica—we are reiterating our long-term marginal cost for U.S. natural gas of $3 per thousand cubic feet.
We see more and more evidence that U.S. shale producers can survive (and in a few cases thrive) at much lower prices than we previously assumed. We view energy sector valuations as frothy at current levels, but we do think the names below are worth further investigation from investors.
