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Quarter-End Insights

Energy: A False Sense of Security for Oil Markets

The inevitable resumption of production growth in the U.S., coupled with expansion in Libya and Nigeria, will likely nudge crude stockpiles higher again in 2018.

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  • Crude fundamentals look healthier than they've been for years, largely due to voluntary curtailments from OPEC and its partners. By giving up 1.8 million barrels per day (mmb/d), combined, this group has engineered a temporary supply shortage in an effort to realign global inventories with the long-term average before the cuts expire at the end of 2018. 
  • However, several months of stagnating shale growth, driven by a sharp increase in drilled-but-uncompleted wells and the fallout from Hurricane Harvey, have lulled oil markets into a false sense of security. The inevitable resumption of growth in the U.S., coupled with expansion in Libya and Nigeria, will likely nudge crude stockpiles higher again in 2018--whether other OPEC members comply with fully agreed production targets or not. 
  • Even before the OPEC cuts are lifted, supply is likely to outstrip near-term demand growth and tip the industry into oversupply in 2018, driven by rapidly growing U.S. output. Our 2018 and midcycle forecasts for West Texas Intermediate are still $48/bbl and $55/bbl, respectively.
  • Despite our bearish outlook for near- and long-term oil prices, we see pockets of opportunity in the oil and gas space. Energy sector valuations look fairly valued at current levels, with an average price/fair value estimate of 0.98. Still, on a relative basis, energy is one of the cheaper sectors, with several others trading at a price/fair value above 1.05.

 

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