Global oil market will take time to hit supply/demand equilibrium

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REBALANCING supply and demand in the oil market may take time as lockdown measures ease across the globe, according to Moody’s Investor Service.

The credit-rating firm in May cut its medium-term oil price outlook to $45-$65 per barrel (bbl) from the previous $50-$70/bbl, with a price recovery expected by early June as supply reductions match up with falling demand.

“We expect an uneven and prolonged rebalancing of the oil market,” it said, adding this will not trigger a broad review of oil-industry ratings.

A price recovery towards its projected range will depend on the pace of demand recovery and on “sustained” discipline in cutting production.

The Organization of Petroleum Exporting Countries (OPEC) and allied nations (OPEC+) on June 6 agreed to further extend production cuts of 9.6 million barrels per day (bpd) until the end of July to balance the oil market.

The group decided to cut output in April following a market crash as demand fell due to the impact of the coronavirus disease 2019 (COVID-19) pandemic.

Moody’s trimmed its price outlook for the North American benchmark West Texas Intermediate (WTI) to $30/bbl this year and $40/bbl in 2021. In April, prices at WTI fell to negative territory for the first time, meaning producers had to pay to store their oil during the glut.

Moody’s also reduced its price assumptions for the international benchmark Brent to $35/bbl for 2020 and $45/bbl for next year.

The low prices in 2020-2021 are “credit negative” for the oil sector, pressuring return on capital and future growth and delaying capital investment.

“Even as oil prices are recovering, financial risks will remain high, especially for smaller and lower-rated exploration and production (E&P) and oilfield services and drilling (OFS) companies,” Moody’s said.

Meanwhile, lower margins and product demand prompted global oil refiners to seek liquidity to shore up their working capital, “implying higher leverage despite a short-term gain in liquidity from issuing debt,” according to Moody’s.

“Any ratings impact from a refiner raising debt to supplement liquidity would depend on whether the increase in debt is temporary or permanent… Ratings implications would depend on how likely we believe the refiner will repay the new debt, including whether the company has publicly said it intends to do so,” the credit rating company said. — Adam J. Ang