Oil and gas industry conditions stand to gain strength after 2017, in a confluence of growing demand and a collapse in no-shale capacity, according to an end-of-quarter report from Morningstar in Chicago.

“We are increasingly bullish on oil prices rallying in the medium term, and have raised our WTI forecast to $65/bbl for 2018, which is the level we believe is required to drive a large-scale recovery in U.S. shale activity,” wrote analyst Joe Gemino. “Even so, the strength of U.S. shale is lurking beneath the surface: Our analysis shows that the recent uptick in rigs and falling shale decline rates together are enough to stabilize U.S. crude production within six months.”

Gemino also said that if U.S. activity doesn’t scale back, production will begin to grow again in 2017. That highlights the strength of tight oil in the country, he said, which would limit a commodity price rebound.

“Should a price rally ensue, it is far too strong to not overheat and eventually snuff out any future oil price rally. We remain bearish on oil prices for the longer term, and we reiterate our mid-cycle oil price outlook of $55 WTI ($60 Brent),” he said.

But keeping the above in mind, Gemino said, there is more evidence that shale producers can survive – perhaps even thrive – at lower prices than assumed in earlier forecasts.

Through labor cost-cutting and efficiency advances in technology, shale producers have managed to reduce production costs, which makes drilling profitable even at lower commodity prices. In February, some producers made headlines suggesting that “$40 is the new $70” per-barrel price needed to drill, but that has yet to fully manifest.

Copyright: Rig Zone