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By Preston Caldwell | 06-19-2018

We still expect oil prices to fall

Geopolitical issues and global demand may temporarily be pushing oil prices higher, but we don't see that as sustainable.

Preston Caldwell: Over the last several months, oil prices have steadily climbed upward and now stand at about US$66 per barrel WTI. This is above the Morningstar energy team's long-term forecast of US$55 per barrel WTI. Yet we think the factors causing oil prices to be elevated are merely temporary factors. The long-term factors which underpin our low-cost, US$55-per-barrel oil price thesis remain as strong as ever and are substantiated by deep research our team has done.

The factors propelling prices higher in the short term include geopolitical issues such as the collapse of Venezuelan oil production due to internal political and economic chaos as well as anticipation of Iranian production falling due to the reimposition of sanctions by the Trump administration. 

Additionally, global demand has been somewhat stronger than expected. Short-term bottlenecks in U.S. shale production growth have also played a role, although we note that U.S. oil production still has grown about 1.3 million bbls/day over the last year, outpacing what we'd expect in a normal year.

Some analysts have speculated that U.S. shale's inability to quell the rise in oil prices reveals a fundamental flaw in shale's ability to provide sustainably lower cost oil. We think this reasoning is incorrect. Our team's deep analysis into the two key sides of the shale cost equation--cost per well and production per well--indicate that US$55 per barrel is the long-term marginal cost for shale. And, therefore, as these short-term issues in global oil markets fade away, we believe oil prices will likewise converge to US$55per barrel, our below-consensus long-term oil price forecast.

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