Oil price seen at US$40 this year

In its maiden crude oil price assumptions publication, RAM Ratings said it expects prices to average at US$40 this year, before moving up to US$45 in 2017.

The firm did not rule out a possible spike in prices after 2018.

This is based on its expectation that the glut in supply will narrow slightly this year, before tapering to a more balanced position by mid-2017.

It foresees the oversupply gap to narrow more significantly by mid-2017 as global production growth slows amid a relatively sustained pace of consumption.

The price of crude oil hit a low of US$28 a barrel in january but had recovered somewhat trading at around US$40 a barrel last week.

It remained 60% lower from where in was in June 2014.

“Despite the recent uptrend, we believe prices are likely to be pressured by the significant uncertainties over the growth of supply from Iran – and Saudi Arabia if it decides to maintain its market share – as well as concerns about unsustainable consumption expansion in major consumer markets,” it said in the first issue of the publication.

The rating house said any sustainable price increase would be gradual and take place only in the second half of 2016, while a more significant uptrend was anticipated in the second half of 2017 as supply and demand neared equilibrium.

“We also believe that any substantial upside will be constrained by the fundamentally oversupplied crude market and the hefty inventory overhang, which is likely to last beyond 2018,” it added.

RAM also assumes little or no impact from joint efforts by Saudi Arabia, Russia, Venezuela and Qatar to limit output growth.

This, it said, was as the output ceilings were based on January output, which were at near record-high levels.

“The collapse in crude prices and the persistently weak outlook have led to substantial cutbacks in development spending over the past year.

“It has been estimated that about US$400bil of projects within the global oil and gas sector has been deferred or cancelled.

“If this continues, it will have a considerable impact on future production capacity and may cause demand to outstrip supply,” it said.

The rating house added that global production growth was expected to decline to an average of about 0.7 million barrels per day (b/d) this year and 0.3 million b/d in 2017.

Much of this slowdown, it said, would stem from a reduction in US output over the next two years, although offset by robust production by the Organisation of the Petroleum Exporting Countries.

The expansion in world consumption, it said, was expected to hold steady at about 1.1 million to 1.2 million b/d in 2016 and 2017, largely supported by China, developing Asian countries, the United States and Europe.

RAM said its maiden publication on crude oil prices represented its assumptions when assessing the credit strength of corporates which had a tangible exposure to the commodity.

The assumptions, it said, would also be used to arrive at its sovereign ratings.

It said the disclosure of its crude oil price assumptions aimed to promote greater transparency and understanding of its credit assessments.

An annual update will be published to renew the two-year crude oil price assumptions as and when the assumptions change.

Source: The Star