Lower world production costs, US shale growth potential, and shale producers' ability to quickly respond to changing market conditions likely will keep average annual oil prices below $60/bbl for the long term, Fitch Ratings of Chicago said.
But Fitch analysts noted oil prices remain volatile and could periodically exceed their assumptions.
“We have updated our base-case price assumptions to reflect the limited upside for prices in the long term,” Fitch said. “We have also reduced our UK National Balancing Point gas price assumptions due to our updated oil price assumptions and an expectation that global liquefied natural gas capacity additions will probably result in a supply surplus.”
The US Lower 48 land rig count has risen around 45% since Dec. 31, 2016, contributing to a rebound in US crude production of more than 9.5 million b/d from a trough of about 8.4 million b/d in July 2016, Fitch said.
“We continue to expect US production growth to remain robust in the second half of 2017 based on the roughly 2-4-month lag between spudding shale wells and production,” Fitch said, adding its analysts remain skeptical about the effectiveness of the Organization of Petroleum Exporting Countries production-cut targets. Lower production compared with October 2016 is intended to rebalance supply and demand in the near term.
Fitch noted Libya and Nigeria are exempt from the production-cut targets of 1.2 million b/d by OPEC members. Analysts said Libya and Nigeria both are producing at higher levels since the production-cut targets were implemented in January.
Other obstacles include weak enforceability and OPEC’s poor adherence track record, Fitch said. OPEC's average compliance rate slipped to 75% in July from almost 100% at the beginning of the year, the International Energy Agency estimates.
OPEC compliance improved to an estimated 82% in August, but overall Fitch expects average compliance rates in the second half of 2017 and beyond will be weaker than in the first half.