The outlook for the refining, E&P and oilfield services businesses remains “cyclically negative” according to rating agency Moody’s in new report being released today.
What looked like an oil price recovery in recent months was due to “OPEC cutbacks, oil’s use as a U.S. dollar and inflation hedge, advance buying by China, and resurgent financial player money going back into oil,” the report notes. But the Chinese oil buying is slowing, the price surge was ill-timed as it may have undermined some of the demand recovery.
“Solid world demand recovery for physical oil products and natural gas is needed for each of the sub-sectors to recover. Industrial recovery is vital because it collapsed by far the most. …. We at best expect modest oil demand growth next year, with fairly flat U.S. and OECD oil demand.”
A few other points:
• “most refiners will post very weak 2009 second quarters, including losses, ignoring non-cash inventory gains. The third quarter will be weak if summer driving stays muted.”
• “Critical cost differentials between low and high quality crudes remain compressed, hurting complex refiners like Valero, Tesoro, and most of the integrated majors, and medium complexity refiners worldwide.”
• For E&Ps “cash flows and liquidity may be pinched further as hedge portfolios roll into lower prices and banks redetermine leveraged E&P’s borrowing bases under less robust 2010 price assumptions than last spring.”
• “As falling oil and gas prices hit producers’ unhedged cash flow, reduced cash flow reduces their spending, and this progressively cuts into drilling/OFS pricing power. Negative momentum could continue well into 2010 as spending cuts progress through the OFS functions and older contracts roll off.”
• “We do not envision a return to recent years’ heroic oil or natural gas prices. Many of the transitory causes have passed, we expect slow demand recovery and, specific to natural gas, glutted storage has to be worked off, and ample prompt supply from the gas shales looms. We expect prices to fluctuate seasonally within $3/mcf to $5/mcf over the next twelve months, and average under $6/mcf for at least the year after.”