Fitch Ratings on Wednesday announced that it has lowered its corporate forecast assumptions for oil and gas prices this year due to recent weakening in supply and demand fundamentals.
Oil prices in the current US$30/barrel range “are not sustainable over a protracted period, as they cover cash costs but not the replacement of developed reserves,” the New York-based credit rating agency says in a statement.
Its base case forecast assumption for oil in 2016 is US$45, and in stressed market conditions it is assuming US$35 per barrel. In the long-term, its base case oil price is US$65, as supply weakens and demand rebounds.
So far this winter, the record warm winter produced by El Nino has significantly reduced near-term demand for heating fuel in the Northern Hemisphere, the Fitch statement notes. “Absent a sustained return in cold weather, the next catalyst to watch on the demand side would be the ramp-up of the summer driving season and summer air conditioning load,” the statement says.
On the supply side, Fitch notes that U.S. production remained higher than many expected, despite sharply lower prices. However, it expects to see accelerating declines in production later this year.
“The financial lifelines that have helped support many producers, like hedges and supportive bank financing, are under increasing pressure,” says Mark Sadeghian, senior director at Fitch, in a statement. “More broadly, the cumulative impact of two years of outsized global capex cuts is expected to result in a significant supply adjustment and eventually pave the way for the beginnings of a price recovery.”