Morgan Stanley raises its oil price forecast, warns US shale may struggle to meet demand

Key Points
  • Morgan Stanley raised its price targets on oil by $7 to $9 per barrel.
  • The market will need more U.S. shale oil because OPEC and other exporters are capping their output.
  • But a shortage of fracking crews and equipment is creating bottlenecks in U.S. shale fields, while drillers are focusing on financial discipline.
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Morgan Stanley has raised its forecast for oil prices through 2020, saying the world is hungry for more U.S. shale crude at a time when it's uncertain American drillers can deliver it.

The bank now sees international benchmark fetching $62 a barrel in the final quarter of the year, up from an earlier estimate of $55. U.S. West Texas Intermediate crude is poised to average $56 for the quarter, up from Morgan Stanley's prior $48 call.

By the second quarter of 2018, Morgan Stanley forecasts Brent will average $63 and WTI will trade at $58 a barrel.

Demand for oil is growing at a surprisingly high rate, leading to a rapid drop in U.S. crude inventories, Morgan Stanley says. At the same time, OPEC and other oil exporters including Russia are likely to extend a deal to keep 1.8 million barrels off the market through next year.

Outside of OPEC, there is little growth in oil supplies, with the exception of the United States, where drillers can quickly tap shale wells, the bank notes. But even in the U.S. Lower 48, the number of rigs operating in oilfields has been falling.

To balance the market, U.S. shale drillers will have to grow production from about 5.9 million barrels a day this year to 7 million barrels a day in 2018, more than previously thought, Morgan Stanley analysts conclude. That would require drillers to start standing up 8 to 10 new rigs each month, but the analysts are uncertain that will happen.

"Right when the world's reliance on shale is growing, its limits are starting to become apparent, and there seem to be two aspects to this: ability and willingness," they wrote in a research note on Monday.

Companies say bottlenecks are forming because they cannot book the crews and equipment needed to carry out hydraulic fracturing, the process of injecting water, minerals and chemicals underground to break up shale rock formations and allow oil and gas to flow to the wellhead. Costs for oilfield services are also rising.

At the same time, exploration and production companies are reining in production growth in order to put their finances in order. Drillers may be reluctant to dive deeper into the red to fund growth at a time when investors are asking for financial discipline.