FITCH: Higher US shale production will keep a lid on crude prices this year

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Recent strength in global crude prices will see US shale oil production lift in the second half of 2017, and the average price this year come in below the levels seen in January and February.

That’s the view of Fitch Ratings which suggests that high global inventories and recovering US production will partially offset the effect of production cuts from both OPEC and non-OPEC members in the first half of this year, resulting in a slow return to its long-term equilibrium price forecast of $65 per barrel.

“Global inventories of both crude oil and refined products are well above historical averages, which could continue to put pressure on refiner profitability,” the group said in a note released on Monday.

And that may be amplified by increased shale oil production in the US, it says.

“US total and land rig counts have nearly doubled from their lows in May 2016, reaching 754 and 737, respectively, at 24 February. This pick-up in activity has contributed to a rebound in US crude production to over 9 mmbbl/d [million barrels per day] from a trough of about 8.4 mmbbl/d in July 2016.

“We expect US crude production’s upward trend 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.”

Fitch’s latest price forecasts are shown below.

Source: Fitch Ratings

Fitch says that it has also re-established a Brent-WTI spread in its base case scenario forecasts to reflect the “anticipated resurgence of US shale production, logistics costs, inventory trends, and refinery incentives”.

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