Increased supply of oil from Iran and concerns over demand growth in countries like India and China will drive oil prices yet lower in 2016 as output vastly exceeds consumption, Moody’s Investors Service has said.
The rating agency estimates crude oil prices to average $33 per barrel in 2016, $10 lower than its previous estimate and expects rates rising by $5 a barrel each in 2017 and 2018.
“We are reducing our oil price estimates in light of continuing oversupply in the global oil markets, with Iran poised to add more than 500,000 barrels per day (bpd) to global supply while demand growth remains tepid,” Moody’s said in a statement.
Stating that it has adjusted its view downward for the likely range of prices, the rating agency said it saw “a substantial risk that prices may recover much more slowly over the medium term than many companies expect, as well as a risk that prices might fall further.”
“Even under a scenario with a modest recovery from current prices, producing companies and the drillers and service companies that support them will experience rising financial stress with much lower cash flows,” it said.
Oil cartel OPEC and many non-OPEC oil producers continue to produce without restraint as they battle for market share, and the addition of Iranian oil to the market in 2016 will offset or exceed a roughly 500,000 bpd decline in the US production, it added.
“OPEC countries continue high levels of production in the battle for market share, contributing to the current oil glut despite moderate consumption growth by key consumers such as China, India and the US, Moody’s Senior VP Terry Marshall said.
Production now exceeds demand by about 2 million bpd, adding to already high global oil stocks, it said.
“Moody’s reduced its price estimates for Brent crude and West Texas Intermediate crude amid continued oversupply in the oil markets and the risk of additional supply from Iran,” it added.
Crude prices are currently trading at a 12-year low of sub $30/barrel.
Moody’s also expects the rise in Iranian oil output this year to offset or exceed production cuts in the US.
The report on Global Oil and Natural Gas Industry said current large global inventories will take time to unwind and will continue to drag on prices even as demand picks up.
Moody’s said its price estimates are likely to be revised during the year based upon updated information on market fundamentals and futures prices.
The report said the $33 estimate of the average price realised per barrel during 2016 implies an upward trend from current spot prices to a price meaningfully higher than $33 by year-end.
“Moody’s would be likely to lower this estimate if such an upward trend were not to materialise over the next several months,” the statement added.