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Don’t Expect a Sustained Recovery in Oil Prices Soon

The lack of an actual OPEC agreement to cut production and the potency of U.S. shale mean a recovery in oil prices isn't likely to occur until 2018, says Morningstar's Preston Caldwell.

Preston Caldwell: Much attention has been given to the recent announcement by OPEC that its members will soon agree to cut production up to 700 mb/d from current production levels. Oil prices rallied on the news, but our view for continued low oil prices of $50 per barrel WTI in 2017 [detailed in our recent Oil Markets update] remains unchanged. While the low end of the target range is nearly 1 mmb/d lower than our 2017 forecast for OPEC production, and if realized, would balance markets and reduce inventories sooner than our original expectations, we see numerous risk factors that we think prevent a sustained recovery in prices until 2018.

First, no agreement has formally been reached, and we can only place limited credibility in merely an "agreement to reach an agreement." Pre-existing political tensions, namely between Iran and Saudi Arabia, which could ultimately scuttle a deal or delay implementation. Second, history shows that OPEC has a poor track record of coordinating production cuts among its members, with quotas often breached or outright ignored.

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