Changes to Fitch Ratings oil and gas price assumptions are modest, but we believe that supply controls will support medium-term oil prices in the range of USD60-USD65 a barrel for Brent crude. In the longer term, we continue to expect prices to fall below USD60/bbl driven by the falls to marginal producers’ full-cycle costs.
The 2019 Brent price assumption is unchanged at USD65/bbl, reflecting solid demand growth, which will be met by increased supplies from the US. Overall, the market is likely to be well supplied in 2019. We believe that OPEC and some other oil producing countries, including Russia, the so-called OPEC+, will have some spare capacity to absorb potential non-major supply shocks as sanctions against Iran have proved less severe than originally assumed. We increased the Brent-West Texas Intermediate (WTI) spread to USD7.5/bbl in 2019, reflecting a persistently high price differential due to remaining constraints on the US export opportunities. These will ease as new export infrastructure is commissioned.
In the very near term, prices will be driven by the decision to be taken by OPEC and OPEC+ at their meetings on December 6 and 7. We believe that, despite pressure from the US, the most likely scenario is that key oil producers will agree to some production cuts to stabilise the market, though these are unlikely to be enough to bring the market into balance in 2019. This should result in oil prices moderately rising. On December 4, Brent traded at USD62.2/bbl and WTI at USD53.26/bbl.
Our Brent oil price assumptions for 2020 and 2021 were raised to USD62.5/bbl and USD60/bbl, respectively. The revision reflects our expectations that OPEC+ will manage output to keep average prices above USD60/bbl in the medium term, although its ability to secure prices above USD70/bbl may be limited by US pressure.
There is also a clear divergence in the oil price requirements of Saudi Arabia and Russia, two main driving forces behind the OPEC+ agreement, which may weaken the block’s production discipline. Russia has fully adjusted to the lower price environment and its 2018 fiscal breakeven price is about USD55/bbl, while we project Saudi Arabia’s will stay above USD80/bbl. Nevertheless, Saudi Arabia has shown that it can unilaterally manage supply to ensure strong compliance with production cuts, when needed. We do not expect any material impact from Qatar quitting OPEC given that the country’s oil production contributes less than 2% of OPEC’s total.
Our long-term price assumptions are unchanged at USD57.5/bbl for Brent and USD55/bbl for WTI. We maintain our view that the US shale industry should continue to be a marginal oil producer but should be able to meet a significant portion of global demand growth for the next several years. We believe per-barrel full-cycle costs have remained broadly stable.
The pace of US shale growth will be a significant factor in the oil price level. The US Energy Information Administration expects US crude production, including natural gas liquids, to grow by about two million bbl per day (mmbpd) in 2018 and 1.7 mmbpd in 2019, which should exceed global demand growth. However, infrastructure limitations will continue to limit by how much US production could grow every year and contain a risk of material oversupply. There are several large pipelines with expected completion dates in 2019 and 2020 that will partially alleviate constraints.
Our stress case price deck remains broadly unchanged fluctuating in the USD40-USD50/bbl range in the next few years. This could materialise if OPEC+ fails to control supply and switches to a volumetric growth policy, or if the global economy slips into recession. We do not expect the most recent price assumptions revision to trigger any immediate rating actions in our global corporate portfolio.
Source: Fitch Ratings