KUALA LUMPUR: Moody´s Investors Service is reducing its near-term oil price assumptions for West Texas Intermediate (WTI) and Brent as a deeper economic recession in the United States and other leading economies further reduces demand for oil products before an economic recovery in 2021.
Moody’s vice president — senior credit officer Elena Nadtotchi said exceptionally weak short-term prices will persist until production drops enough to ease the strain on storage facilities already operating at or close to full capacity.
“Significant supply adjustments in due course should help to balance the market later in 2020, but the pace of the market’s rebalancing and rising oil prices will depend on demand recovery.,” she said in a statement today.
Moody’s price assumption for WTI, the North American benchmark crude is now $30 per barrel (bbl) for 2020 and $40 in 2021.
For the main international crude benchmark Brent, Moody´s sees prices averaging $35 per bbl this year and $45 in 2021, while oil production will decline in 2020-21 because of both the agreed Opec+ deal and production shut-ins in the US and Canada.
The US Energy Information Administration (EIA) estimates that by May 2020, US crude production will decline by 5.0 per cent or about 480,000 barrel per day (BPD) from the start of the year and natural gas production by 3.0 per cent.
Moody’s expects production cuts to gather speed in the second half of 2020.
The industry also accelerated deep cuts to current capital investment, which we expect will bring further declines in production globally in 2021.
The rating agency said these depressed prices cannot be sustained in the medium term because they do not support reinvestment in production—a necessary step in a sector where production naturally declines.
While sharp destruction in oil demand should be short-lived, a recovery in demand in the latter half of 2020 will likely be slow and will depend on recovery momentum in transportation.
Moody’s medium-term price band for North American natural gas at the Henry Hub — the industry’s chief benchmark for wholesale US natural gas prices — remains at $2.00-$3.00 per million British thermal units as an accelerated reduction in supply will help support recovery in natural gas prices in 2020.
Meanwhile, Moody’s said financial risk is rising and likely to remain very high for all but the highest-rated oil and gas issuers.
Low oil prices and storage shortages will most directly hurt the exploration and production (E&P) and oilfield services and drilling companies, particularly lower-rated issuers with significant refinancing requirements in 2020-21.
Midstream companies will, in turn, need to manage heightened counterparty risks as E&P credit quality deteriorates.
The refining and marketing sector, which is currently hit by working capital outflows and low margins, will be the first to benefit from a recovery in demand. – Bernama
