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Quarter-End Insights

Energy: OPEC Adds a Plot Twist, but Ending Is Unchanged

Improved near-term fundamentals come at a cost.

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  • U.S. production growth will lag any increase in rig activity by six to nine months, which is why we're now more bullish on 2017 oil prices. But once it gets rolling, shale production should start to grow briskly, which means that much softer industry fundamentals are likely to return once OPEC unwinds its production cuts.
  • Based on current 2017 supply/demand fundamentals, our new base case for the United States is a 500-rig scenario, in which the horizontal tight oil rig count increases 30% from today's 380 over the next six months. Our forecasts demonstrate that U.S. shale growth can be substantial at activity levels that remain well below predownturn levels.
  • The short-term nature of OPEC's cuts and the long-term problem for oil prices that is U.S. shale mean our bearish $55/bbl WTI long-term price outlook is unchanged.
  • Energy sector valuations remain a bit frothy at current levels with an average price/fair value estimate of 1.14.

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