Fitch Lowers Corporate Oil and Gas Price Assumptions
OREANDA-NEWS. Fitch Ratings has cut the oil and gas price assumptions it uses when rating energy-sector corporates, reflecting the continued imbalance between oil supply and demand, as well as our expectation that marginal costs will fall further in the medium term.
While the gap between oil supply and demand appears to have peaked at 3 million barrels per day in Q215, the market is unlikely to balance until 2H16 at the earliest when it will still have to digest elevated oil stocks. We have therefore effectively pushed back the slow recovery we had assumed by one year and now include a modest price recovery only in 2017. Our new assumption, or price deck, is for Brent to average USD55 a barrel in 2016 and USD65 a barrel in 2017, with WTI averaging USD50 a barrel in 2016, rising to USD60 a barrel in 2017.
We have also lowered our long-term price deck for Brent to USD75 a barrel. This reflects a combination of upstream efficiencies and cost deflation in oilfield services, which will push down marginal costs globally over the next few years. Efficiency gains in US shale were already factored into our mid-year update and our long-term assumption for WTI therefore is unchanged at USD 70 a barrel.
Our price decks for US and European natural gas prices have also been lowered. This has been driven by pricing pressure in the Eastern US from low-cost shale gas and our view that gas sold under oil-linked contracts in Europe sets an effective cap on the European National Balancing Point prices over the medium term. For a full list of the changes in our assumptions, see the report "Oil and Gas Price Assumptions November 2015" on www.fitchratings.com or by clicking the link above.
Our price deck is not a specific forecast but a reasonable set of assumptions for rating issuers through the cycle. It is based on fundamentals and does not incorporate the potential for significant geopolitical or inflation premia, which can be a significant factor in actual prices. Rating oil and gas companies on a through-the-cycle basis means there is tolerance for leverage metrics to rise during a down-cycle.