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, Fitch Ratings says. We therefore expect average oil prices for the year to be below those in January and February.

OPEC’s November announcement that its members would cut production by about 1.2 million barrels per day (mmbbl/d) and the commitment of non-members to curtail production by roughly 600,000bbl/d have helped support oil prices in a USD50-55 range. OPEC compliance has reportedly been strong, but it remains to be seen whether it will be enough to meaningfully reduce abnormally high inventories. The exclusion of Libya and Nigeria and a poor record of adherence by some members makes us sceptical that the arrangement will be sustainable in the longer term..

At the same time, US rig counts have nearly doubled from their lows in May 2016, which has contributed to a rebound in US crude production to over 9mmbbl/d. We expect this upswing in production to continue throughout 2017 due to the rise in rig activity, increased capex budgets, and the roughly two- to four-month lag between spudding shale wells and production.

We have updated our base-case assumptions to reflect our view of supply fundamentals and the impact of OPEC’s production cuts. We have also re-established a Brent-WTI spread in our base case to reflect the anticipated resurgence of US shale production, logistics costs, inventory trends, and refinery incentives.

Our 2017 base case Brent price assumption has been raised to USD52.50/bbl from USD45/bbl and we continue to assume prices of USD55/bbl in 2018, USD60/bbl in 2019 and USD65/bbl in the long term. Our 2017 WTI price assumption was raised to USD50/bbl from USD45/bbl and our assumed 2018, 2019, and long-term prices were all adjusted lower by USD2.50/bbl to reflect the re-established Brent-WTI spread. The base case does not factor in the effects of a potential US border adjustment tax.

We have raised our UK National Balancing Point (NBP) gas price assumptions by USD0.25 for 2017 and 2018, mainly due to our updated oil price assumptions. But we continue to expect a medium-term glut in liquefied natural gas to keep NBP prices subdued, with the rise in US gas exports a key contributor to the anticipated overcapacity. Our Henry Hub price expectations are unchanged.

Source: Fitch Ratings