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‘’U.S. Rig Count Must Drop 150 For Oil Markets To Balance’’

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Analysts and investors have been growing increasingly concerned that the OPEC-led production cuts would not be enough to bring the oil market back to balance, and now one investment bank, Morgan Stanley, is saying that if the market stands any chance of rebalancing next year, U.S. shale possibly needs to drop around 150 rigs.

“If OPEC doesn’t balance the market, the oil price will have to force it somewhere else, most likely in U.S. shale. For a chance of a balanced market in 2018, the U.S. rig count can no longer grow and possibly needs to contract ~150 rigs. Given current break-evens, this requires WTI between $46-50,” Morgan Stanley analysts said in a research report on Thursday, as quoted by MarketWatch.

According to Morgan Stanley, despite OPEC’s cuts, global inventory levels are currently around the same high as they were last year.

“To support prices in the mid-$50s, OPEC-12 would probably need to lower production by another 200,000-300,000 barrels a day and extend the output agreement to end-2018. We find this unlikely,” the bank’s analysts said.

“The combination of little impact on physical balances, but a strong signal to invest has meant that the OPEC cuts have had a perverse effect: on current trends, the oil market would be oversupplied again in 2018,” Morgan Stanley warned. And they see U.S. rig count in need of dropping between 120 and 180 rigs to keep oil output from flooding the market.

Last week, the number of active oil and gas rigs in the United States fell by a single rig, ending the US shale patch’s impressive run of 23 weeks of steady gains, but oil and gas rigs in the United States are still 509 rigs up from this time last year. Related: Oil Prices Leap Higher On Strong Draw In Crude Inventories

Morgan Stanley not only warned that the glut will be here to stay next year, but it also slashed its oil price forecasts for Q3 and Q4 2017 for both WTI and Brent. The analysts cut their forecast for WTI price for the rest of this year to US$48 per barrel from the previous forecast of US$55. Brent forecast was lowered to US$50.50 from US$57.50.

At 11:03am EDT on Thursday, WTI was up 1.46 percent at US$45.49, while Brent was trading up 1.32 percent at US$48.42.

By Tsvetana Paraskova for Oilprice.com

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  • Bud on July 06 2017 said:
    Laughable that the thousands of bpd added monthly by the Permian is the cause of the worlds oil glut. OPEC flooded an already glutted market in Q1. Reducing ethanol usage and caps could alone require more than a million bpd in additional oil. Using lighter tight oil vs the heavier grade imports (with lower energy content just like ethanol) would actually decrease our oil needs as well.
  • Wes on July 07 2017 said:
    I live in the Bakken oil region, and I own minerals here. I can never understand what goes through the minds of the oil company execs. Here we are in a significant oil price slump and yet these companies are drilling away out here. It may not be the primary culprit, but it doesn't help the glut and the subsequent drop in prices either. We can only chalk it up to greed because the companies are still making money at this level, and they want MORE and MORE.

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