Continued growth in global oil demand means recent downward fluctuations in prices of the commodity are unlikely to lead to a precipitous long-term fall, Moody’s rating agency investors service said Tuesday (21 October 2014).
“It’s hardly shocking that oil prices have weakened in the face of growing supply,” Moody’s Managing Director Steve Wood said in a report. “But last week’s sharp drop has been surprising and can be attributed to expectations of weaker demand growth in China and Europe at the same time that Saudi Arabia has threatened to defend market share rather than acting as OPEC’s — and the world’s — swing producer.”
But Moody’s said falling oil prices are set to impact on drilling and service companies. Lower prices will hurt exploration and production (E&P) companies’ revenues immediately, with most of the drop falling straight to the bottom line because of their high operating leverage, Moody’s said.
“If lower prices persist, drilling and oilfield services companies will be pressured as E&P companies reduce capital spending and their demand for services,” Moody’s said in the report, Drilling and Services Companies Most Vulnerable to Tumbling Oil Prices.
The rating agency said it has not changed the price assumptions for oil it uses in its ratings analysis.
Despite growing supply, particularly in the United Stastes, longer-term pricing should remain above $80 a barrel, given growth in global demand, Moody’s added. That said, prices could easily dip into the $70s/bbl range in the next several months.
Another significant factor weighing on prices is the strengthening US dollar. Because oil is denominated in dollars, a stronger dollar leads to lower oil prices, Moody’s said.