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Oil Markets' Fundamentals Improving, but U.S. Shale Still Looms

Recent rig additions could weaken the recovery's strength.

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Crude markets have tightened a good deal in recent months, as strong demand growth and supply issues have pulled forward the industry recovery by about a year relative to our previous outlook. Fundamentals after 2017 are looking particularly bullish for prices, and an oil price rally in 2018 is looking more and more likely. We’ve raised our 2018 West Texas Intermediate forecast to $65 per barrel.

Even so, the strength of U.S. shale is lurking beneath the surface. Our analysis shows that the recent uptick in rigs and falling shale decline rates together are enough to stabilize U.S. crude production within six months. If activity isn’t scaled back, U.S. production will begin growing in 2017, albeit barely. This underscores the strength of U.S. tight oil: Should a price rally ensue, it is far too strong to not overheat and eventually snuff out any future oil price rally. We remain bearish on oil prices longer term, and we reiterate our midcycle oil price outlook of $55 WTI ($60 Brent).

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