New fears as oil prices downgraded by ratings agency

New fears as oil prices downgraded by ratings agency
3 min read
22 January, 2016
Moody's rating agency gave a new, more pessimistic, forecast for oil prices in 2016, leading to worries for Arab oil producers of massive budget deficits.
Saudi businesses are bracing themselves for a challenging 20165 [AFP]

Oil markets rallied on Friday, reaching just over $30 a barrel. But celebrations from oil-producing countries are likely to be muted and fleeting.

Moody's ratings agency revised its forecasts downwards for the price of oil in 2016 and the outlook looks grim for economies reliant on hydrocarbon sales.

The group now forecasts the price of Brent oil - an international benchmark - to average at $33 a barrel, down from earlier predictions of $40.

This will likely be bad news for Gulf countries which are making drastic cuts to expenditure to cope with the downturn and hoped for prices to be well above the $33 forecast.

It is unclear what Saudi Arabia - the Arab world's biggest producer by far - envisioned prices to be in 2016.

Analysts presenting the most conservative estimates of $37 a barrel would still mean Riyadh's budget would end the year with heavy losses.

"Oil prices have deteriorated substantially in the past few weeks and have reached nominal price lows not seen in more than a decade," Moody's said.

Moody's put 120 gas and oil companies down for possible ratings downgrades, half in the US where shale oil has led to an explosion of surplus oil.

These are the companies Saudi Arabia was reportedly planning to kill off, when it ramped up oil production and flooded the market with cheap oil.

Oil prices have deteriorated substantially in the past few weeks and have reached nominal price lows not seen in more than a decade.
- Moody's Investor Services

"We see a substantial risk that prices may recover much more slowly over the medium term than many companies expect, as well as a risk that prices might fall further," Moody's added.

"Even under a scenario with a modest recovery from current prices, producing companies and the drillers and service companies that support them will experience rising financial stress with much lower cash flows."

However, Saudi Arabia will not be immune to the shock particularly if rumours of a $80 breakeven point for oil are true. 

Riyadh might also be forced to ramp up defence spending with the war in Yeman showing no signs of abating and tensions with regional powerhouse Iran possibly leading to new unforeseen expenses.

Saudi Arabia already has the fourth highest military expenditure in the world and its war in Yemen is estimated to be costing the country the country $22 million a day.

Meanwhile, sanctions on rival Iran ended on Sunday with Tehran announcing it would export a further 500,000 barrels on oil which would offset cuts from other producers.

It is why BMI Reseach continues to believe that events in the first two weeks of the year "reinforces our view that 2016 will be another tough year for commodity markets and that a sustained recovery will remain elusive".

Hopes that oil prices will pick up again and push past the $50 mark next year were also dampened by Moody's forecast.

The ratings agency believes that the price will only rise by $5 on average in 2017 and 2018, which would lead to more difficult years for Arab oil producers, The Financial Times reported.