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Coming Shale Growth a Major Threat to Oil Prices

Rapid U.S. production growth is looming.

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OPEC’s production cuts and strong demand growth have 2017 crude fundamentals in their best shape since oil prices crashed two years ago. The consensus outlook is that fundamentals are now strong enough to remain healthy even after OPEC’s cuts lapse. This might have been possible a few months ago, but the odds of this scenario playing out have markedly worsened since. The reason is that major increases in shale activity now have U.S. production firmly on a path of rapid growth, even if rig counts don’t increase further. This growth plus the eventual supply increases from OPEC is likely to be more than enough to erase any market tightness and throw crude markets back into oversupply.

What’s obvious by now is that current oil prices provide economics that are very attractive to the major U.S. shale producers. This has created the conditions that will allow tight oil to grow rapidly and is a reality that even looming cost inflation will not change. Unless shale producers become more disciplined or OPEC resigns itself to permanently ceding share to the United States--neither of which is likely to occur--oil markets have major problems looming.

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

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