The annual report of Moody’s Investors Service has predicted that prices of Oil and natural gas will be volatile in 2019.
The report, which outlined key credit themes in oil and gas for 2019, noted that while the recent announcement that OPEC and Russia would cut production helps alleviate concerns about oversupply, the pivotal questions in the coming year is whether OPEC and Russia would maintain their production discipline and what might happen in June, when the current agreement expires.
According to the report, Moody’s expects the medium-term price band for West Texas Intermediate (WTI) crude, the main North American benchmark, to be $50-$70 per barrel (bbl), and North American natural gas at Henry Hub to average $2.50-$3.50/MMBtu.
The report reads in part: “Market expectations for continued strong oil demand growth remain in place, despite concerns about slowing demand growth as a result of weaker economic growth, the impact of tariffs and a strong US dollar,” Moody’s Managing Director for Oil & Gas, Steve Wood said.
“Very high Saudi and Russian production, in particular, has heightened supply volatility, so whether OPEC and Russia maintain production discipline and renew agreements to limit output are key concerns going into the new year.”
Moody’s also stated in the report that Investors in exploration and production companies would continue to wait for better returns in 2019.
It also added that although capital efficiency has improved and commodity prices are higher than in 2015-16, infrastructure constraints have lifted transportation costs.
“And though the oilfield services sector would see earnings increase by 10-15 per cent, they currently remain at low levels, and most of the recovery would occur only later in the year.
“Conversely, refiners’ distillate margins would begin to expand from already strong levels in the second half of next year.
“In North America, wide differentials for regional oil and natural gas would narrow as infrastructure coming into service in late 2019 and 2020 eases bottlenecks in the Permian Basin, western Canada and other regions, relieving stress on commodity prices.
“Meanwhile, the Mexican energy sector faces risks from factors including a new government policy that shifts PEMEX toward refining and away from oil production, and Asian national oil companies contend with risks from volatile commodity prices, rising shareholder returns and evolving fuel-price regulations.
“While we will see only a gradual increase in rig activity in 2019, oilfield services (OFS) costs will likely rise over the medium term. Higher oil prices will encourage more production activity, which will stimulate already rising OFS prices, raising the breakeven cost of the marginal barrel and potentially raising medium-term oil prices.
“In North America, strong demand from shale producers is driving up pricing for high-calibre “super spec” drilling rigs, and for various production services. In Texas, strong economic growth and low unemployment have led to widespread labour shortages, escalating labour cost inflation. International activity is picking up in certain markets.
“But it will take higher oil prices to develop the more expensive conventional barrels that are ultimately needed to meet increasing global demand and offset natural production declines.
“Prices toward the upper end of the oil price-band will encourage increased supply as US production grows and OPEC countries reduce their compliance with their production quotas.
“Shale oil production in particular features relatively low extraction costs and short time lags from drilling to production, and shale’s drilling efficiencies have increased substantially over the past few years. US shale producers are paying increasing attention to capital discipline and return-focused performance, but even at current lower prices, we believe US shale production will continue to grow, increasing global production and keeping a lid on prices.
“We believe prices will remain largely within our expected range —although they will be volatile—amid increases in US shale production, reduced but still significant global supplies, and potential declining compliance with agreed production cuts, especially if growth in demand is more tepid,” the report added.
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