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Fitch Ratings cuts oil, gas price assumptions on coronavirus, price war

March 20/ 09:20

Moscow. Fitch Ratings has cut its short- and medium-term oil and natural gas price assumptions in expectation of very large market oversupply in 2020, Trend reports citing Fitch Rating.

“We assume the market will gradually rebalance in the next two to three years, but we have also trimmed our long-term assumptions to reflect continued efficiency gains, low break-even oil prices of many greenfield projects and a potential for demand to slow due to energy transition.

“Fitch estimates the crude oil market will be massively oversupplied in 2020 because of waning demand due to the coronavirus outbreak and growing production following the OPEC+ failure to agree on output cuts. Saudi Arabia intends to increase production from April and utilise its significant spare capacity. This could keep the Brent price below USD40/bbl for the rest of this year, as the magnitude of oversupply in 2020 in various scenarios is likely to be much larger than the maximum of 1 million barrels a day (mmbpd) seen in the past.

“We expect the market to rebalance in the next two to three years due to a recovery in demand once the coronavirus outbreak is contained, slowing or declining US shale production due to its short-cycle nature, and potential production adjustments from OPEC countries. Both Saudi Arabia and Russia, the key parties to OPEC+, have fiscal break-even Brent prices above current market prices, at USD91/bbl and USD53/bbl, respectively.

“We expect US shale production to return to growth when oil prices stabilise, as happened in 2016- 2017, which would limit the extent of the price recovery. Natural gas markets are also vastly oversupplied, both in the US and globally. Current prices in Europe and Asia rarely cover the half-cycle cash costs (that include variable operating costs and transport to Europe) of natural gas and LNG suppliers, including Gazprom and US producers, and are therefore unsustainable.

“We assume the Dutch TTF and UK NBP gas prices in Europe will gradually recover to USD5.5/mcf over three to five years, broadly corresponding to the full-cycle costs of US producers, including shipping to Europe and capex. We assume the US Henry Hub price to recover to USD2.5/mcf in the long term. However, gas prices will remain low in the next two years due to weak demand for LNG in China, high volumes of gas in European storage and commissioning of new LNG capacity, albeit at slower pace than in 2016-2019.

“Our ratings will be driven by issuers' expected credit profiles in 2020-2023 (assuming their liquidity remains sufficient), rather than when prices trough. This is in line with our "rating-through-the-cycle" approach. We do not anticipate that this revision of oil and gas prices will trigger portfolio-wide negative rating actions, but we will assess the credit impact case by case. High-yield issuers are more exposed, particularly those with high liquidity and refinancing risks, given tough capital and asset sale markets,” said Fitch Ratings.

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