BAKU, Azerbaijan, March 24
By Leman Zeynalova – Trend:
Moody’s assumes that Brent crude benchmark oil price will average $40-$45 per barrel in 2020 and $50-$55 in 2021, about 30 percent and 15 percent below its previous expectations, respectively, and a decline of similar proportions from the 2019 average, Trend reports citing Moody’s.
“We assume that international oil demand starts to recover with the global economy later in 2020, and that supply adjusts somewhat, with a lag,” the company said in its report.
However, there are downside risks to these assumptions, stemming from the uncertain global growth outlook and the possibility that competition for a greater market share in the oil market leads to an even larger increase in inventories, depressing prices further and for longer, the report shows.
“In contrast with the sharp oil price decline in 2015-16, which came from much more elevated levels, we expect the fall in 2020-21 to reverse in the coming years. We see the decrease as being mainly driven by the coronavirus shock and consequent actions by oil producers, both of which should later rewind. Consequently, we have not changed our expectation that oil prices will average around the midpoint of $50-$70 per barrel over the medium term,” said Moody’s.
Materially lower oil prices in the near term compared with the company’s previous assumptions are credit negative for oil- and gas-producing sovereigns, many of which rely heavily on oil and gas sales for both fiscal revenue and foreign currency receipts.
“To the extent that lower fiscal revenue constrains the governments' ability to spend, weaker oil prices will also reduce GDP and employment growth in the non-oil sector. This shock will combine with the direct impact from the spread of coronavirus, especially where the tourism, transportation and hospitality sectors are relatively large, including in Oman, UAE, Bahrain and Saudi Arabia,” reads the report.
Moody’s said that during periods of higher oil prices, many oil- and gas-exporting countries accumulated significant sovereign assets, which provide a degree of resilience during a period of lower oil prices.
“This is especially so where the liquid portion of these assets significantly exceeds government debt and is readily available to finance fiscal deficits and debt repayments. For example, we expect that in 2020 drawdowns from fiscal reserves will be up to 5 percent of GDP in Saudi Arabia and 10 percent of GDP in Oman.”
---
Follow the author on Twitter:@Lyaman_Zeyn