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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.

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