No one wants to miss the train leaving the station with analysts’ lowered oil and gas price forecasts for 2016, and Fitch Ratings is now on board. The ratings agency lowered its base case oil price to $45 a barrel for 2016 and its long-term base case price to $65 a barrel. The agency’s 2016 “stress case” price dropped to $35 a barrel.
If oil and gas is not under stress yet, it’s hard to figure how stressful the situation needs to be. West Texas Intermediate (WTI) crude oil for March delivery traded below $28 a barrel in the noon hour Wednesday, down about 6.5% on the day. At that price, many producers can’t meet their costs of production, much less their reserve replacement costs. Last November we noted that the cost of producing a barrel of oil onshore in the United States was around $36 at a time that crude was selling for around $40 a barrel.
The senior director of Fitch’s U.S. oil and gas research said:
The financial lifelines that have helped support many [high-yield] producers, like hedges and supportive bank financing, are under increasing pressure. More broadly, the cumulative impact of two years of outsized global capex cuts is expected to result in a significant supply adjustment and eventually pave the way for the beginnings of a price recovery.
Warm weather so far this winter has also tamped down natural gas prices. Fitch’s base-case price for natural gas in 2016 is $2.50 per thousand cubic feet. The long-term base price is $3.25 per thousand cubic feet. Natural gas was trading Wednesday at around $2.10, hardly an encouraging sign.
WTI for March delivery posted a 52-week low Wednesday morning of $27.56. On its last trading day, February oil traded down more than 7.5% at $26.30 a barrel. These are spot prices, so they are higher than contract pricing.
Buyers like Enterprise Products Partners L.P. (NYSE: EPD) are offering to pay $24.91 per barrel today for WTI. North Dakota Light Sweet is fetching an offer to buy at $19.39 a barrel. Over at Plains Marketing, the posted price for WTI is $24.00.
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