Fitch Ratings Upgrades Short-Term Oil and Gas Price Expectations
Fitch Ratings raises short-term oil and gas price assumption as the market performance outpaced bearish projection in the first half of 2021. The recent oil rally has forced how the rating agencies see price movement following a rather optimistic demand outlook post-lockdown. This has been largely supported by stronger economic data in the United States and some European countries.
Goldman Sachs maintained prediction that oil prices will trade at $80 a barrel in 2021. Just while the market is savouring the projection, the International Energy Agency called for ‘no investment’ in fossil fuel as part of plan to achieving net-zero emission.
The report which the Organisation of Petroleum Exporting Countries and allies call disappointing has been generating issue among stakeholders.
Now, the Fitch Ratings has raised projection on the prices of oil after proper evaluation of the market direction.
In a recent report, Fitch increased its 2021 and 2022 oil price assumptions for the Brent and West Texas Intermediate (WTI) benchmarks, attributed to stronger year-to-date prices, a deficit in the market caused by a recovery in demand, and constrained supply from OPEC+ countries and heightened US capital discipline.
“We have also raised our 2021 and 2022 Title Transfer Facility (TTF) gas price assumptions. Increases in spot gas prices are being driven by low gas inventories in storage, strong demand in Asia, and recovering demand in Europe”, the ratings explained.
Meanwhile, it noted that all price assumptions from 2023 are unchanged. Fitch Ratings analysts explained that oil demand has been improving this year and is likely to continue to grow in 2H21 if vaccination rollouts are successful and pandemic-related restrictions are eased.
Saying that new breakouts, particularly of new Covid-19 variants, remain the main risk for the sustained recovery in demand.
It recognised that output policies of OPEC+ countries are key to managing oil supply. OPEC+’s planned production increases, originally agreed in April and confirmed in June, will help meet growing demand, but Fitch thinks it will be insufficient to balance the market in the second half of 2021.
“OPEC+ has spare capacity of about 7 million barrels per day (bpd), which should be sufficient to cover increasing demand in the short term.
“There is some uncertainty over how quickly production could ramp up relative to the pace of the recovery in demand, which may lead to price volatility”, it added.
Furthermore, the Ratings believe that lifting of the sanctions against Iran could add about 1.5 million bpd of oil, although it expressed the view that OPEC+ could mitigate the impact of additional output from Iran by slowing production increases.
Despite a rise recently, Fitch analysts understand that oil production in the US is still about 1 million bpd lower than in early 2020.
US shale producers shifted capital allocation priorities towards debt reduction and measured shareholder returns over growth, which will moderate potential increases of US shale output, at least in the short term. The number of active US oil rigs is only half the pre-pandemic level but is still about twice as many as in summer 2020.
“TTF price rises are supported by strong demand in Asia and recovering demand in Europe (reinforced by cold weather and restocking after the winter), while supply increases have been insufficient to meet recovering demand, leading to low gas inventories in storage.
“Surging carbon prices in Europe have also contributed to gas price growth. However, we believe the price rally in H1-2021 is temporary. Once gas storage facilities are gradually filled during H2-2021 and 2022 to their normal levels, demand should subside, leaving the market oversupplied”, Fitch said.
Fitch Ratings Upgrades Short-Term Oil and Gas Price Expectations
