New reports by the Moody’s Investors Service lower previous estimates for Brent crude in 2016 from $43/bbl to $33/bbl. It also sees estimation for West Texas Intermediate falling to $33/bbl from $40/bbl previously.
The report was a product of analysts’ survey conducted by Moody Investors Service, a global credit rating provider.
The new price estimates, according to Moody’s, bridges whatever “differential that exists between Brent Crude, which represents the most common market benchmark for international oil prices, and WTI, the common benchmark for North American prices.
The implication, going by the position adopted by Moody’s, is that oil prices will recover more slowly from present turbulence remaining well below $50/bbl through 2018. “There is also a risk that oil prices could move even lower than our estimates. We left our estimates for natural gas unchanged at $2.25 in 2016 and $2.50 in 2017,” Moody added.
The ratings agency suggest that global oil demand will increase by about 1.3 million bpd by 2016 however prices will remain low for some time, “with the potential to fall further,” it added. The lifting of sanctions from Iran will compound the glut in global oil supply and further hasten the decline of US production by about 500,000 bbls/day in 2016 following large-scale US shale drilling reductions.
Meanwhile, Moody’s plans to downgrade a record 130 integrated oil, exploration and production (E&P) and oilfield services and drilling (OFS) companies. This is in addition to 36 E&P companies that were put on review for downgrade in 2015 by Moody’s. It also said that there is a possibility of “multi-notch downgrades across all the oil and gas sectors.”
Furthermore, the report projects that many companies will find it increasingly difficult to sustain capital investment through internal funding in the coming years. This could in turn compel R&P and integrated companies to cut their capital spending bringing additional pressure on the OFS segment. The intense pressure on the OFS is likely to affect debt covenants and liquidity.
In order to survive, most countries might be forced to lower their capital spending which will affect production. The flattening decline in production, however, will encourage increased demand, force market tightening and eventually price recovery. These will no doubt happen gradually, “we’re seeing a classic oversupply price crash and it will take some time before we see a supply response.”
Frank Eleanya
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