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Quarter-End Insights

Energy: Rally in the Works, but It Won't Last Long

We expect a medium-term oil price rally in 2018 but remain bearish on long-term oil prices.

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  • Energy sector valuations remain frothy, with a market-cap-weighted price/fair value average of 1.22.
  • Underinvestment is laying the ground for oil prices to rally, but recent U.S. rig additions could weaken the recovery's strength.
  • Relative to our previous outlook, we expect a medium-term oil price rally in 2018, driven by increased 2017 demand forecasts coupled with supply disruptions in Venezuela and Nigeria. However, we remain bearish on long-term oil prices.

Crude markets have tightened a good deal in recent months, as strong demand growth and supply issues have pulled forward 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 likely.

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