Fitch Predicts $40 Oil If U.S. Production Keeps Ramping Up

From OilPrice.com: Oil bigwigs should take a step back before becoming too comfortable with the new oil price range according to Fitch Ratings’ newest market analysis.

“The recovery in US drilling activity will drive up shale oil production in the second half of 2017, offsetting a portion of recent oil price gains,” the credit rating agency’s report released on Monday says. “We therefore expect average oil prices for the year to be below those in January and February.”

In a stable market scenario, Fitch estimates that by the end of this year, oil prices will fall to $52.50, but then rebound to $55 and then $60 in 2018 and 2019, respectively. Long-term prospects for Brent barrels sit at $65 in this model.

A stressed, oversupplied market will mean a $40 barrel through 2019, however.

Since January, a 1.8 million-barrel global production cut led by the Organization of Petroleum Exporting Countries (OPEC) and joined by several other nations has kept prices between the $55-$60 range.

Compliance to the terms of the November deal by members of the bloc has been strong. Last week, new data showed that OPEC’s compliance stood at 94 percent.

But non-OPEC enthusiasm for the deal has been much talk, with moderate action. A February 23rd report puts compliance by the 11 NOPEC nations at a modest 60-66 percent.

Fitch cited the continuous increase of active oil rigs in the United States since May 2016 as key evidence for an impending price collapse. American production is set to top nine million barrels over the course of 2017, the analysts estimate, due to rejuvenated capital expenditure budgets and higher output capacity.

The total number of active oil and gas rigs in the United States is now 756, according to oilfield services provider Baker Hughes, which is 267 rigs above the rig count a year ago.

The United States Oil Fund LP ETF (NYSE:USO) was unchanged in premarket trading Tuesday. Year-to-date, USO has declined -3.75%, versus a 6.34% rise in the benchmark S&P 500 index during the same period.

USO currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #38 of 121 ETFs in the Commodity ETFs category.


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