Gas prices are up big YTD, but they continue to trade at deeply depressed levels when compared to their 2014 highs. Many market participants are counting on a rebound in oil and gasoline prices in the long-run, but when is the long-run and how high will oil and gas prices go in the long-run?
According to Morningstar we can expect a recovery in oil prices to about $65 per barrel within two years, a year ahead of the firm’s prior estimates.
Oil Supply-Demand Gap Should Clear in 2018
We’ve accelerated our estimate for oil market clearing due to stronger-than-expected demand and supply disruptions, but we’re not budging on our lower-than-consensus long-term price forecast.
Preston Caldwell: In our last overview of the oil markets, we projected a clearing of the supply and demand gap in about 2019, which would then provoke a rise in oil prices, which would be the necessary incentive to bring U.S. shale production to a level which would fulfill any future supply gaps.
Now, we’ve accelerated our views. Because of stronger-than-expected demand growth, as well as enduring supply disruptions in Nigeria and Venezuela, we now expect this clearing of the markets to occur in 2018. Consequently, our 2018 price target now stands at $65 for WTI.
Nevertheless, these short-term bullish developments do not budge our long-term view. Our midcycle price remains set by U.S. shale production which is relentlessly advancing in productivity. So this price target still stands at $55.
As a result of this lower-than-consensus long-term price target, we remain bearish on most stocks in the energy sector. However, we have identified select E&Ps, like RSP Permian as well as most refiners, HollyFrontier leading the pack, which remain compelling buys in this current market.
Oil Supply-Demand Gap Should Clear in 2018
Jeremy Jones, CFA
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