Oil expectations are being dimmed by another familiar source. Moody’s Investors Service has lowered its oil price assumptions for both Brent and West Texas Intermediate (WTI) crude. While the lower assumptions are meant to reflect increases in oil production and with muted demand, it seems fair to wonder what happens to all the credit ratings of the oil patch players if their new price assumptions are still too high for 2016 and beyond.

Moody’s also said that it has decided to maintain its price assumptions for North American natural gas. This decision reflects continued strong natural gas production and demand from electrical generation.

Moody’s lowered its price assumption in 2015 for Brent crude to $55 from $60 per barrel. For WTI, Moody’s cut its target to $50 from $55 per barrel for 2015. The 2015 assumptions seem more or less in line with average pricing seen this year, but the real issue is whether Moody’s assumptions for 2016 and beyond are too generous given the current price and supply climate for oil.

This might not matter on the surface to industry observers and participants, but if Moody’s has forward price assumptions that are too high then it means that Moody’s credit ratings for all those oil and gas bonds (junk bonds particularly) may be much more optimistic than they should really be.

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Moody’s said that its medium-term price assumptions reflect its view that the supply-demand equilibrium will eventually be reached at around $75 per barrel for Brent and $70 for WTI. That is far higher than the last rally that petered out at in June. At this time, WTI was under $45 per barrel, so $70 would require a rally of more than $25.00, or more than 50%, that is also sustained up around that level.

On Brent, Moody’s thinks its $75 assumption is a price that would support development of the world’s most expensive oil in an environment of lower development costs than in recent years. Still, Moody’s said that it now expects that this price will only be reached at the end of the decade. On forward prices, Moody’s said:

We expect prices to rise only gradually in 2016, but not enough to keep pace with rapidly expanding production. In addition, there is the risk that the recent deal between international parties and Iran could lead to an increase in the country’s exports, which would further weigh on prices.

Again, what if the price assumptions are simply too generous? WTI was last seen challenging $44.00, and this is a crucial area if you go back to spot crude pricing just under current levels earlier this year. A spot crude (WTI) price chart from Bloomberg has been included below.

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