Shale is Still the Key Long-Term Constraint on Oil Prices

Oil & Gas
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Thursday, March 15, 2018 /07:27 AM / Fitch Ratings 

The OPEC-plus production cut agreement has improved the near-term outlook for oil prices, but U.S. shale growth and responsiveness should result in a production surplus this year, Fitch Ratings says. We think that this is likely to take prices back below USD60/bbl, and that shale's ability to meet a significant portion of global demand growth will keep prices in the USD50-60/bbl range over the long term.

We have raised our base-case average price assumptions to USD57.5/bbl (Brent) and USD55/bbl (WTI) for this year and next, an increase of USD5/bbl for 2018 and USD2.5/bbl for 2019. These are also our forecasts for 2020 and beyond. The stronger near-term price outlook reflects the success of OPEC-plus in reducing excess stock, and our expectation that compliance with the agreement will remain fairly strong in 2018.

But upside for prices is constrained as efficiency gains and higher activity continue to drive the growth of U.S. shale production. Our expectation that U.S. oil production, including gas liquids, will rise by at least 1.5-1.7MMbpd in 2018 is based on progress so far, the rising number of drilling rigs and continued efficiency gains. This is likely to result in global oil production exceeding demand this year and oil prices falling back below USD60/bbl. We also think U.S. shale has the capacity to satisfy the largest part of incremental demand for oil at least for the next several years, which will keep prices below USD60/bbl in the longer term.

OPEC-plus compliance should remain fairly strong throughout 2018, primarily driven by Saudi Arabia and Russia continuing to adhere to quotas. However, in the longer term the ability of OPEC to control production and prices is questionable, given the gradual adjustment of participating producers to lower oil prices and their unwillingness to cede market share to U.S. shale producers.

Our revised near-term forecasts are unlikely to have widespread rating implications for oil and gas companies given our "through-the-cycle" rating approach. Higher price assumptions could marginally improve projected credit metrics, but these may be partially offset by higher capex or shareholder returns. However, liquidity pressures for deeply high-yield exploration and production companies, which are an important credit driver, could ease.

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