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Stock Strategist Industry Reports

Game Change: Low-Cost U.S. Oil Is Here to Stay

Oil prices are likely to rebound from here, but robust U.S. supply will ultimately cap upside.

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Given its remaining growth potential and ability to quickly scale activity up and down, tight oil has effectively made the United States the world's newest swing producer. Drastic spending cuts will lead to a meaningful decline in near-term production, but the strong economics of the major U.S. liquids plays mean production will again begin growing as soon as oil prices recover. Based on our belief that U.S. unconventionals will continue to be able to meet 35%-40% of incremental new supply requirements in the coming years, we believe additional volumes from high-cost resources such as oil sands mining and marginal deep-water will not be needed for the foreseeable future. This disruptive force that already has upended global crude markets isn't going away anytime soon. U.S. shale once again is proving to truly be a game changer.

Despite our belief that tight oil has considerable running room from here, it can't completely meet future global demand. The marginal barrel therefore will come from higher up the global cost curve. Our forecasts show higher-quality deep-water projects will be the highest cost source of supply needed during the rest of the decade. As a result, we are lowering our Brent midcycle oil price forecast to $75 a barrel (West Texas Intermediate $69/bbl).

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