A decline in global and industrial demand for oil and natural gas is likely to drive commodity prices lower and keep them there for the near to intermediate term, according to an article in the latest edition of the ‘Oil & Gas Insights’ newsletter from Fitch. As a result, the rating agency has lowered its price deck for oil and gas to $19.50 and $2.15, respectively, for 2002.

“Global demand will wane and fundamentals of supply and demand will force oil lower, while high inventory levels, coupled with decreasing industrial demand, will factor into lower gas prices,” said Sean Sexton, senior director, Fitch. “Inventories for natural gas are currently at the top of the six-year range for 1994-1999.”

Regarding its lowered crude forecast, Fitch also cites increasing non-OPEC production, declining OPEC cohesion and Saudi Arabia’s reluctance to relinquish its OPEC market share as additional factors.

Despite the decline in commodity prices, Fitch said it has assigned a stable outlook to the upstream segment of the oil and gas industry because it has derived much benefit from the last two years of high prices.

Fitch said in its newsletter that prices for West Texas Intermediate (WTI) averaged $30.36/bbl in 2000 and will average approximately $26.00/bbl in 2001. On the natural gas side, prices averaged approximately $4.29/Mcf in 2000 and will average approximately $4.00/Mcf in 2001. Fitch pointed out that prices during the last two years for WTI are nearly 50% above their historical averages of $19/bbl-$20/bbl.

“As a result of current prices remaining in line with historical averages and current expectations of midcycle-type hydrocarbon pricing, Fitch has assigned a stable outlook for the upstream segment of the oil and gas industry,” said Sexton.

As for domestic gas pipeline and midstream companies, Fitch said that three dominant industry trends will influence the segment’s credit quality over the near to intermediate term. In the newsletter, Fitch identified the trends as: interest in energy companies in the master limited partnership (MLP); ongoing industry restructurings; and the changing business risk due to changes in markets, infrastructure investment and regulatory oversight.

Upon researching the MLP model, a partnership structure designed to allow public trading of partnership units, Fitch concluded that the credit impact of these structures is company specific.

“Several companies in the pipeline/midstream group are adopting and/or increasing the use of an MLP structure as an efficient and profitable way to expand operations,” said Ralph Pellecchia, senior director, Fitch. “Fundamental to Fitch’s ratings of MLPs is the type and quality of assets that generate operating cash flow, how these assets are operated, and how they are financed.”

The latest edition of ‘Oil & Gas Insights’, Fitch’s quarterly look at developments in the oil & gas industry can be obtained by contacting Market Services at (800) 853-4824.

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