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Morningstar analyst sees 'light at the end of the tunnel' for oil, gas producers

Cutbacksin capital expenditures and drilling by U.S. oil and gas producers are helpingbalance the market, but a full recovery is still many months away, Morningstaranalyst David Meats said.

"Productionin the U.S. is certainly rolling over and that's a good thing, and at least youhave the first signs of discontent in the Middle East," Meats said in aninterview March 30 after issuing an investor note on the topic. "I'mfairly skeptical on real cuts coming in the Middle East, except that you havecountries like Saudi Arabia and Russia that are actually talking about thisstuff. But a second year of substantial capex cuts and the collapse in rigcounts [in the U.S.] is starting to have an effect."

Gettingto the point where supply and demand for oil to equal again, however, dependson many more factors than just producers cutting back.

Anychange to the supply/demand equation would appear to be at least a number ofmonths away from taking hold due to tepid demand growth and large amount ofexisting reserves, Meats said.

"There'snot going to be much of a change in the near term," he said. "U.S.output is slowing, and OPEC output is at least growing less quickly, but demandis growing slowly, as well. Markets won't come back into balance until late2016 or early 2017 at the earliest."

Asimilar scenario faces U.S. natural gas, where decreases in production in manyparts of the country are still largely offset by the ability to produce atextremely low cost in the Marcellus and Utica shales. Meats said cutbacks inoil production will lead to a corresponding drop in associated gas, but theprolific Marcellus and Utica will prevent any major jump in pricing.

"Associatedgas, which is the biggest growth source of natural gas outside of the Marcellusand Utica, has had the breaks put on. … It's substantially eroded," hesaid. "But the production in the Marcellus and Utica continues to growrobustly. Prices to produce there are so cheap that companies with the best acreagecan keep drilling and still be profitable."

Forcompanies operating in the best parts of the Marcellus, such as , Meatssaid, there is no real reason to cut back on production in spite of low prices.

"Theyalready have contracts in place, and they have access to [pipeline]infrastructure," he said. "There's still an imbalance in the system.While long term, you have tailwinds like LNG offtake and [petrochemical]feedstock increases due to low prices, as well as coal-to-gas [electricgeneration] switching … none of those are going to bring prices up to a higherlevel in three to six months. It's a longer-term process. There's a light atthe end of the tunnel, but it's still a long way off."