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Oil prices are heading to $40 a barrel as US output keeps surging in 2018: Seaport Global

Key Points
  • Mike Kelly predicts an oversupplied oil market in 2018 causing oil to stabilize at $40 per barrel in the second half of the year.
  • Investors won't change their aggressiveness until numbers drop below $40, he said.
  • Company debt levels could be a threat to banks if investors back out.
Analyst: Energy downgrade mostly based on US production outlook

In the wake of plunging oil prices and predicting a significantly oversupplied market in 2018, Seaport Global Securities recently predicted that oil could stabilize at $40 per barrel after the first half of 2018.

In an interview on CNBC's "Power Lunch," Mike Kelly, managing director and head of E&P Research at Seaport, came out to explain the firm's new expectation and why they downgraded 31 E&P companies.

Kelly predicts next year's oil production will be more explosive than people expect, at 1.8 million barrels per day growth in the U.S., almost twice what the International Energy Agency's expectation is. He also doesn't see non-U.S. oil production slowing, expecting a 2.2 million-barrel-a-day oversupplied market in 2018.

The break-even point could head toward $40 per barrel in the long term, according to Kelly, but that won't scare off investors quite yet.

"The feedback from investors after meeting with companies was, they're not going to change their aggressiveness with their rig count adds until you get below $40," said Kelly.

U.S. crude oil hit a new nine-month low on Wednesday, trading below $43 a barrel, although it has jumped up slightly on Thursday. Oil has dropped more than 20 percent since mid-February.

While the stock levels are a threat to investors, the debt levels threaten banks. Low oil prices are becoming a credit issue for the companies Seaport covers, with the average E&P company over three times its net debt. Yet the credit market is "not accurately reflecting the dangers yet," according to Kelly.

The big question, according to Kelly, is, "Will Wall Street investors be there again for this next downturn that we're calling round two of low oil prices?"

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