Global oil, gas prices to remain weak in 2016: Moody's

Global oil and gas prices will remain weak in 2016 on continued oversupply that will result in at least 20-25 per cent reduction in capital spending in upstream oil and gas exploration and production, Moody's Investors Service said today.
In its report 'Oil and Natural Gas Industry - Global: Persistent Weak Prices in 2016 Rein in Capital Spending, Heighten Financing Risk', it said oversupply will continue to hold down oil and gas prices in 2016.
"OPEC and many non-OPEC oil producers continue to produce without restraint as they battle for market share. Increased production has vastly exceeded growth in oil consumption, including from major consumers like China, India and the US," it said.

The potential lifting of sanctions on Iran could add significant supply to the market in 2016, offsetting or even exceeding expected declines in US production.
"The oil and gas sector will see a rise in distressed exchanges and defaults amid the continued low commodity prices that we expect in 2016," Moody's said.
Moody's forecast widely traded Brent crude oil to average USD 43 per barrel in 2016 before rising to USD 48 in next year and USD 53 in 2018.

Low oil and natural gas prices have already directly affected cash flows of exploration and production (E&P) companies, while also significantly weakening other energy companies such as drillers and oilfield service providers due to reduced drilling and completion activity.

"We expect M&A and industry consolidation to increase across the oil and gas industry in 2016, but to remain fairly subdued, since the timing of a commodity price recovery remains uncertain," it said.
Industry stress will force many companies to sell assets to improve liquidity and financial leverage, and increased bankruptcy filings will facilitate more attractive asset valuations.
There would be ample energy asset-purchase opportunities in 2016, but weak commodity prices present a challenge for potential upstream buyers.
"We foresee capital spending reductions of at least 20-25 per cent in 2016 across the E&P industry, and the oilfield services and drilling (OFS) industry will remain the most stressed energy segment," Moody's said.

Lower capital spending will lead to further capital budget cuts for integrated and national oil companies (NOCs), but OFS companies in particular will emphasize cost reduction in response to reduced demand.
Moody's said the positive outlook on the sovereign credit
rating incorporates the implementation of policies, as well as measures to improve fiscal, inflation and external metrics.
The move towards inflation targeting and improved monetary policy credibility contributes to maintaining inflation at moderate levels.
"We assume that the impact on inflation of the significant increases in public sector wages and pensions as most of the Pay Commission's recommendations are implemented, will be limited in size and short-lived. Meanwhile, ongoing fiscal consolidation contributes to more moderate inflation, which will help contain risk premia and thereby financing costs," Moody's said.

It said India's low income levels and potential to improve productivity offer opportunities to 'catch-up' GDP growth at levels higher than similarly rated peers over the longer term.
It said continued high corporate leverage, low nominal domestic growth and lack of corporate pricing power, will hold back investment activity for at least several quarters.
"Despite an accommodative monetary policy stance, we expect growth in domestic fixed asset investment to remain lacklustre," it said.
Outlining India's growth challenges, it said lacklustre global demand constrains exports, which account for around 20 per cent of GDP. Also two years of drought have dampened consumption, with weak rural incomes and higher food inflation lowering purchasing power.

Lastly, it said, high leverage for some large corporates weighs on credit demand while impaired assets in the banking system negatively affect credit supply.
Moody's said corporate deleveraging is likely to take time as cash flows are impacted by weak global demand, and, for the commodity producing and processing sectors, low prices weigh on revenues and profits.
Government's policy response will likely have mixed results. Imposition of minimum import prices for steel, for example, will be mildly positive for the sector.
By contrast, expensive telecom auctions in 2016 will contribute to a further increase in leverage in the telecom sector, which is yet to digest last year's auction outcome, Moody's said.