- Crude fundamentals look healthier than they've been for years, largely because of voluntary curtailments from OPEC and its partners. By giving up 1.8 million barrels per day, or mmbpd, combined, this group has engineered a temporary supply shortage in an effort to realign global inventories with long-term averages.
- Helping OPEC's efforts are geopolitical supply disruptions. Venezuela remains in crisis, and its oil production has slumped further after an initial plunge in the fourth quarter of 2017. President Trump's decision to abandon the Iran nuclear accord is likely to widen this year's crude oil supply-demand imbalance, accelerating the decline of global inventories and potentially leaving the market with fewer days of supply on hand by year-end than it has had at any point in the past eight years.
- However, we believe the market continues to underestimate the capacity of the shale industry to throw oil markets back into oversupply. Crude prices have largely held above $65 per barrel for West Texas Intermediate in 2018, which provides attractive economics for many U.S. producers. But the reckoning may not happen as quickly as we previously thought amid supply disruptions. Eventually, we expect pain for oil prices as growing U.S. production serves as the primary weight to tip oil markets back into oversupply.
- Our midcycle forecast for WTI is still $55/bbl. We think oil bulls are failing to recognize the vast potential for further productivity gains from U.S. producers and are unduly worried about prime shale acreage running out more quickly than it really will.
- Despite our bearish outlook for 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 to fair value estimate of 1.00.
We previously viewed the late 2017 decline in global crude stockpiles as a temporary respite, to be derailed by the shale surge that still looks likely this year. However, economic malaise in Venezuela has triggered precipitous output declines, and it isn't clear how quickly this can be rectified, if at all. The likelihood of hefty outages in Iran has soared now that Trump abandoned the Iran nuclear accord. And other OPEC producers are fanning the flames with even steeper cuts than they originally agreed to. All this creates a supply vacuum this year that can easily offset U.S. growth, however strong, and prolong the illusion that shale isn't a threat. Regardless, oil prices must pare back eventually to prevent catastrophic growth from U.S. shale.