Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

Morningstar provides data on more than 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 16 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $180 billion in assets under advisement or management as of June 30, 2015. We have operations in 27 countries.

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Commodities

<p>As many expected, OPEC announced on Nov. 30 that it will extend its <a href="https://www.smartkarma.com/entities/22869" target="_blank" data-smartkarma-citation="entities:22869:1">Crude Oil (CRUDE OIL COMDTY)</a> production cuts through the end of 2018. But the impact of these cuts will fall short of what the cartel and its partners are hoping for. Several months of stagnating shale growth, driven by a sharp increase in drilled-but-uncompleted wells and the fallout from Hurricane Harvey, have lulled oil markets into a false sense of security. The inevitable resumption of growth in the U.S., coupled with expansion in Libya and Nigeria, will likely nudge crude stockpiles higher again in 2018—whether other OPEC members comply with fully agreed production targets or not. Undoing the progress made by OPEC this year to bring inventories closer to the 2010-14 average will threaten oil prices next year. And the long-term picture doesn't look much healthier, either. The shale industry, which sets prices in our global supply/demand framework, has gotten comfortable with lower prices after several years of relentless efficiency gains. Accordingly, our midcycle forecast is unchanged at $55 per barrel of West Texas Intermediate.</p><h2>Key Takeaways</h2><ul><li>We think the market is overlooking trouble on the horizon for crude-oil prices in 2018, driven by surging U.S. crude production, unexpected growth from the few OPEC countries not bound by production targets, and waning compliance from those that are. We expect the WTI benchmark to average under $50/bbl in 2018, 15% below the closing price on Nov. 29.</li><li>Our midcycle oil price forecast of $55/bbl (WTI) is below most sell-side estimates as well. The U.S. shale industry still has a long runway of Tier 1 drilling opportunities, especially in key growth basins (the Permian, for example). And there's ample scope for further advances in productivity and efficiency, offsetting any cost reinflation from shale service providers and capping break-evens for marginal producers.</li><li>Despite our bearish outlook for near- and long-term oil prices, we see pockets of opportunity in the oil and gas space. The midstream industry can capitalize on robust growth from shale producers and is about 15% undervalued currently (Morningstar Best Idea <a href="https://www.smartkarma.com/entities/22867" target="_blank" data-smartkarma-citation="entities:22867:1">Enterprise Products Partners (EPD US)</a> is our top pick). Weak oil price forecasts drag on most exploration and production valuations, but some low-cost producers still look attractive (including Best Ideas <a href="https://www.smartkarma.com/entities/3645" target="_blank" data-smartkarma-citation="entities:3645:1">RSP Permian Inc (RSPP US)</a> and <a href="https://www.smartkarma.com/entities/24253" target="_blank" data-smartkarma-citation="entities:24253:1">Cenovus Energy Inc. (CVE CN)</a>).</li></ul><p><em>Analysts: Jeffrey Stafford, CFA, Dave Meats, CFA and Preston Caldwell</em></p>

As many expected, OPEC announced on Nov. 30 that it will extend its Crude Oil (CRUDE OIL COMDTY) production cuts through the end of 2018. But the impact of these cuts will fall short of what the cartel and its partners are hoping for. Several months of stagnating shale growth, driven by a sharp increase in drilled-but-uncompleted wells and the fallout from Hurricane Harvey, have lulled oil markets into a false sense of security. The inevitable resumption of growth in the U.S., coupled with expansion in Libya and Nigeria, will likely nudge crude stockpiles higher again in 2018—whether other OPEC members comply with fully agreed production targets or not. Undoing the progress made by OPEC this year to bring inventories closer to the 2010-14 average will threaten oil prices next year. And the long-term picture doesn't look much healthier, either. The shale industry, which sets prices in our global supply/demand framework, has gotten comfortable with lower prices after several years of relentless efficiency gains. Accordingly, our midcycle forecast is unchanged at $55 per barrel of West Texas Intermediate.Key TakeawaysWe think the market is overlooking trouble on the horizon for crude-oil prices in 2018, driven by surging U.S. crude production, unexpected growth from the few OPEC countries not bound by production targets, and waning compliance from those that are. We expect the WTI benchmark to average under $50/bbl in 2018, 15% below the closing price on Nov. 29.Our midcycle oil price forecast of $55/bbl (WTI) is below most sell-side estimates as well. The U.S. shale industry still has a long runway of Tier 1 drilling opportunities, especially in key growth basins (the Permian, for example). And there's ample scope for further advances in productivity and efficiency, offsetting any cost reinflation from shale service providers and capping break-evens for marginal producers.Despite our bearish outlook for near- and long-term oil prices, we see pockets of opportunity in the oil and gas space. The midstream industry can capitalize on robust growth from shale producers and is about 15% undervalued currently (Morningstar Best Idea Enterprise Products Partners (EPD US) is our top pick). Weak oil price forecasts drag on most exploration and production valuations, but some low-cost producers still look attractive (including Best Ideas RSP Permian Inc (RSPP US) and Cenovus Energy Inc. (CVE CN)).Analysts: Jeffrey Stafford, CFA, Dave Meats, CFA and Preston Caldwell

Production Cuts Are a Lousy Panacea for Broken Oil Markets