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Moody’s: “The oil-price boom is fading”

Four pumpjacks on the prairie.

Andrew Penner/iStockphoto

If you're expecting a big rebound among energy stocks from their bear market lows, you might need some patience. Moody's Investors Service argued in a report that the oil-price boom is fading – and so the debt-rating agency cut its outlook on the global exploration and production sector to "stable" from "positive."

Moody's also lowered its crude oil price assumption to $90 (U.S.) a barrel for 2012, and to $85 a barrel for 2013. These prices are for West Texas Intermediate, which is the U.S. benchmark. It also lowered its price assumptions for Brent crude, which is the North Sea benchmark.

The moves follow what has been a dismal period for the energy sector, with the price of oil tumbling 26 per cent since the start of May. Canadian energy stocks within the S&P/TSX composite index have followed: The sector is down 13 per cent this year and 20 per cent over the past year.

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For Moody's, the dismal economic backdrop is key here: "The sovereign debt crisis in Europe has begun to threaten the continent's banking sector, and we foresee weak growth in the U.S. and a slowdown in China that has alarmed central bank authorities there."

While Moody's doesn't seen an energy rebound in the works, at least it doesn't see further deterioration either. That's why it is taking a "stable" outlook, with earnings (before accounting for interest, taxes, depreciation and amortization) among exploration and production firms expected to rise by mid-to-high single digits through mid-2013.

"We would move our outlook to positive if we projected that the sector's EBITDA would grow by more than 10 per cent (annualized) over the next 12-18 months, and to negative if we expected EBITDA growth to retreat by 10 per cent or more," Moody's said in its report.

Lower crude oil prices have caused a lot of rethinking among economists and strategists recently. However, Bloomberg News reported on Thursday that optimism is alive and well among the analysts it tracks.

According to Bloomberg, the median estimate among 32 analysts is for Brent oil to average $114.50 a barrel in the third quarter, marking a 24 per cent jump. It currently trades at $92.15 a barrel, after tumbling 25 per cent since the start of April for its steepest slide since the 2008 financial crisis.

"We do look for a rebound and feel that the oil price has gone beyond economic fundamentals," said Michael Lewis, Deutsche Bank's head of commodities research, according to Bloomberg. "We are in quite an extreme level of investor pessimism, which would only seem to us justified if the U.S. was going back into a recession."

Two weeks ago, Goldman Sachs said West Texas Intermediate oil should trade at about $120 a barrel and argued that a taking a long position is "compelling."

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On Wednesday, Patricia Mohr, economics and commodity market specialist at Bank of Nova Scotia, argued that Saudi Arabia can steady world oil prices by curbing production.

"Saudi Arabia's deliberate over-production in the first half of 2012 – to offset lost Iranian oil due to sanctions and to prevent high oil prices from derailing a fragile world economy – has contributed to a sharp plunge in international oil prices in June, pressuring Western Canadian crude," she said in a note. She added: "We are hopeful that Saudi Arabia will quietly scale back its 'actual' output in coming months to steady prices."

Moody's isn't quite so sure Saudi Arabia will do that, though, arguing that the country not only can tolerate oil prices far lower than their current levels. "It might even prefer them, based on its near- and medium-term political goals."

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More


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