Moody's warns oil could fall into $70s but remain solid long-term
The sharp drop in oil prices is not a prelude to a long-term collapse, insisted rating agency Moody's, but prices could fall into the $70 range in coming months.
Brent Crude
$87.11
07:03 19/04/24
After trading within a $20 band for several years, the 25% drop in oil prices since June, and over 5% in just the past two weeks, came as a shock, admitted Moody's Investors Service in a note.
It said drilling and service companies were most vulnerable to tumbling prices. As global oil demand will continue to grow, the sharp price drop "is unlikely to be followed by a precipitous long-term fall", it declared, even though supply was growing.
The rating agency reiterated its longer-term price assumptions for oil at above $80 a barrel (bbl) but admitted prices could easily dip into the $70s/bbl range in the next few months, with the strengthening US dollar also an influence.
Because oil is denominated in dollars, a stronger dollar leads to lower oil prices.
"It's hardly shocking that oil prices have weakened in the face of growing supply," says Moody's managing director Steve Wood.
"But last week's sharp drop has been surprising and can be attributed to expectations of weaker demand growth in China and Europe at the same time that Saudi Arabia has threatened to defend market share rather than acting as OPEC's - and the world's - swing producer."
The price assumptions Moody's uses for rating purposes were lowered in September to $85/bbl for West Texas Intermediate (WTI) and $90/bbl for European Brent and remain unchanged, while its stress case price of $60/bbl was also unchanged
Moody's said lower prices will hurt exploration and production (E&P) companies’ revenues immediately, with most of the drop falling straight to the bottom line because of their high operating leverage.
If lower prices persist, drilling and oilfield services companies will be pressured as E&P companies reduce capital spending and their demand for services.
Upwards pressure on oil prices come from demand in resources-hungry economies of China, India and other emerging markets, as well as risk elements such as ongoing geopolitical tensions in the Middle East and North Africa.