Fitch: Geopolitics and Demand Support Medium-Term Oil Prices

Oil prices will remain relatively high for the rest of 2018 due to ongoing geopolitical tensions and strong demand, and despite indications from Saudi Arabia and Russia that they may start to increase production, Fitch Ratings says. However, marginal producers' full-cycle costs drive oil prices in the long term and we assume a gradual price fall to below USD60/bbl by 2020.

We have raised our Brent and WTI oil price assumptions for 2018 and 2019. Now we assume Brent will average USD70/bbl in 2018 and USD65 in 2019, compared to the previous assumption of USD57.5 in both years. The revision reflects high year-to-date prices, Venezuela's production decline, continued geopolitical tensions, including the renewal of US oil sanctions on Iran, and strong demand growth.

Saudi Arabia and Russia, two main driving forces behind the OPEC+ agreement, indicated they would consider adjusting production quotas at the OPEC meeting scheduled for 22 June. This should help offset the production declines in Venezuela and a possible drop in exports from Iran after the renewed US sanctions come into force later this year. It is difficult to predict the outcome of the OPEC summit and subsequent compliance with any revised agreement, but we expect any production ramp-ups to be gradual and co-ordinated to avoid the market shifting into a massive surplus.

Our long-term price assumptions, including for 2020, are unchanged at USD57.5/bbl for Brent and USD55 for WTI to reflect our view that the US shale industry should remain a marginal oil producer and should be able to meet a significant portion of global demand growth for the next several years. Higher-than-expected cost inflation may push prices above our long-term expectations; however, we believe per-barrel full-cycle costs have remained relatively unchanged so far. Much also will depend on whether producers would be able to preserve efficiency gains achieved so far as oil prices remain high.

We do not expect this price deck revision to trigger multiple positive rating actions in our global corporate portfolio. However, the recent oil price recovery will alleviate the pain of very high-yield exploration and production companies, for which liquidity remains an important credit driver, and selective positive rating actions are possible for them.

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