Moody's Investors Service cut by $2/Mcf the gas price assumption it uses to assess credit quality to $3.50/Mcf from $5.50, the ratings agency said last Thursday. It also cut its oil price assumption to $45/bbl from $50.
"Lower natural gas prices reflect the high inventory levels coming out of the winter heating season," said Steve Wood, Moody's senior vice president. "Industrial demand for gas continues to be quite soft, and we have not seen a supply response from the dramatic drop in drilling activity across North America."
The change in commodity price assumptions is not expected to have an immediate impact on producer credit ratings, Moody's said. Analysis in recent months has used "stress case" prices in the firm's previous outlook, which are generally in line with the new baseline price assumptions. "However, continued weak oil and natural gas prices will have the greatest impact on smaller independent E&P [exploration and production] companies as well as drillers and oilfield services companies that are leveraged to North American natural gas development," it said.
The Henry Hub gas price outlook is now $3.50/Mcf in 2009, $4.50 in 2010 and $5.50 in 2011 and beyond. These prices are down from the previous outlook set late in 2008 of $5.50 in 2009, $6.00 in 2010 and $6.50 thereafter. Stress case prices are $1.00 lower across the board, the same differential as before. The change reflects much weaker demand expectations, particularly industrial demand and, to a lesser extent, electricity generation.
Gas production has continued to rise on a year-over-year basis, although there is some early evidence of sequential declines in the first quarter, Moody's noted. Gas in storage is about 35% higher than the same time last year. Looking out over the rest of 2009, the potential for additional liquefied natural gas (LNG) supply creates a further overhang on prices, the firm said.
The Moody's action is in line with other analysts' views on the market. Last week Raymond James & Associates Inc. analysts said the gas market is oversupplied by more than 4 Bcf/d on stagnant demand and strong year/year supply growth -- meaning more shut-ins this summer and deeper declines in gas prices (see related story).
The outlook for West Texas Intermediate (WTI) crude oil is $45/bbl in 2009, $50 in 2010 and $60 in 2011 and beyond. Prices forecasts for 2009 and 2010 relative to the prior outlook are down $5 from $50 and $55, respectively. Medium-term prices are unchanged at $60. The stress case forecasts are $10 lower in each time period, the same difference as in the prior outlook.
Oil prices could be an indicator of the level of future LNG imports to the United States by virtue of their effect on price spreads between the Henry Hub and the United Kingdom's National Balancing Point, Merrill Lynch analysts said recently (see related story).
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