- Although we continue to believe that crude oil prices are well below the levels required to incentivize sufficient investment to meet demand beyond 2017, our long-term price outlook has fallen to $70 Brent and $64 WTI, reflecting abundant low-cost supply and industrywide cost deflation. Industry oversupply is making it very likely that crude markets will not approach any semblance of normalcy until 2017.
- Cost-advantaged resources have continued growing in recent quarters despite the slump in prices, thanks to ongoing productivity improvements across U.S. tight oil plays as well as sanctions relief that will result from the Iranian nuclear deal. Longer term, this makes it likely that low-cost oil will continue to crowd out more marginal projects that were being sanctioned prior to oil prices collapsing.
- Further, our originally anticipated point of global supply and demand coming into balance has continued to get pushed further into the future as this year has progressed. This, in turn, has led to a collapse in near-term investment that has increased the magnitude of cost deflation and has considerably weakened the currencies of many commodity-exporting countries. The result is lowered break-even levels for both offshore and oil sands projects, which we expect will be the resources setting the industry's marginal cost once crude markets have rebalanced.
- Although U.S. gas production is likely to slow in the near term as oil-directed drilling hits the brakes, the wealth of low-cost inventory in areas like the Marcellus points to continued growth through the end of this decade and beyond. Abundant supply is holding current prices low, but in the long run we anticipate relief from incremental demand from LNG exports as well as industry. Our midcycle U.S. natural gas price estimate is $4/mcf.
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Dave Meats does not own shares in any of the securities mentioned above. Find out about Morningstar’s