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Can Rising Shale Output Disrupt Oil's Rally? 6 Top Picks
Swarup Gupta

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On May 27, oil prices increased more than 1% boosted by geopolitical tensions and the impact of OPEC’s production controls. Only last week, crude prices had suffered their worst weekly losses of the year due to trade tensions and concerns about global growth.

A new report from Morgan Stanley MS states that deflationary factors will keep oil prices low in the long term. The report does acknowledge the impact of supply bottlenecks and geopolitical concerns that have cropped up this year. However, it says that rising U.S. shale supplies will dampen any rise in crude prices.

But the report has a long list of conditions which would have to hold true if crude prices are to remain depressed even in the long term. With geopolitical tensions likely to persist, investing in oil stocks looks like a smart option.

Geopolitical Tensions, Supply Bottlenecks Boost Prices

This has been a particularly good year for crude prices, with WTI crude gaining nearly $15 since the start of 2019. This is primarily due to tight supplies, which in turn is attributable to three different sources.

First, U.S. sanctions have led to a considerable decline in exports from Iran, taking a significant amount of supply off the markets. OPEC’s output controls continue to support prices and are likely to remain in place for the entire year.

Another factor boosting prices is the disruption in supplies from Russia. The country’s crude output has continued to decline in May, per Reuters. This is attributable to a reduction in exports following the detection of contaminated shipments to Europe in April.

Can Rising Shale Output Cap Gains?

However, Morgan Stanley thinks that the success of U.S. shale producers will cap price gains in the longer term. Its freshly released report does agree that growth in output is declining. However, the report suggests that volumes could still increase considerably in the future. Shale producers are using digitization, automation and robotics to slowly but surely boost their output levels.

Further, since shale oil is an abundant resource, costs should decline as the associated technology improves. This in turn could lead cartels like OPEC to cut prices as well in order to effectively compete with their U.S. counterparts.

But the report takes a rather long-term view and is overly optimistic about shale prospects, per market watchers. They point to the fact that breakeven levels have remained unchanged despite the cost savings incurred from the improvement in technology.

Per a report from the Post Carbon Institute, intensive drilling and increases in capacity have only front-loaded production, leaving actual output relatively the same. Even Morgan Stanley’s report assumes that the E&P industry will overcome most operational obstacles, acknowledging that inability to do so would prevent production from reaching its true potential.

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