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Energy: Don't Expect a Quick Recovery for Crude Prices

Markets have rebounded recently, but much uncertainty remains, meaning near-term prices could remain ugly or deteriorate further.

Dave Meats
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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 midcycle per-barrel price outlook remains at $70 Brent and $64 West Texas Intermediate.
  • But near-term prices could remain ugly or deteriorate further. Back in February a handful of producer countries, including Saudi Arabia and Russia, agreed to freeze output at January 2016 levels to help realign supply and demand. Markets rebounded as a result, but much uncertainty remains, most notably about whether Iran's likely refusal to follow suit will derail the pact or whether actual production in these countries will match agreed-upon levels.
  • Upstream capital budgets in the United States have fallen sharply again this year as producers struggle to align budgets with cash flows. Reduced investment will translate to stronger output declines. This should help bring global markets back into balance as well but how quickly depends on the success of the production freeze initiative described above. Either way, it won't happen overnight.
  • 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 such as the Marcellus and Utica still 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 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 (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.