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Quarter-End Insights

Energy: Pain Persists as OPEC Refuses to Play White Knight

The current glut in crude supply continues to weigh on prices and will take several quarters more to work through.

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  • We continue to believe that crude oil prices are well below the levels required to encourage sufficient investment to meet demand beyond 2017, and our long-term per-barrel price outlook remains at $70 Brent and $64 West Texas Intermediate.
  • Near-term prices could be ugly, though. OPEC spooked markets yet again in December by failing to signal any willingness to cut production and defend prices, even though weaker member states (like Venezuela) are hurting because of lower oil revenue.
  • Upstream capital spending in the United States will fall sharply in 2016 for the second consecutive year as producers struggle to align budgets with cash flows. Reduced investment will translate to stronger output declines, and while it won't happen overnight, this will eventually help markets rebalance.
  • Sharp curtailments in oil-directed drilling activity could also 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.
  • Abundant supply is holding current natural gas prices low, but in the long run we still anticipate relief from incremental demand from liquefied natural gas exports as well as industry. Our midcycle U.S. natural gas price estimate is unchanged at $4 per thousand cubic feet.

Dave Meats does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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