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Moody's Raises Benchmark Price Assumptions on Crude, Nat Gas for FY14, FY15 (UNG) (USO) (OIL)

June 19, 2014 11:53 AM EDT

Moody's Investors Service has raised its assumptions for average spot prices for the two benchmark barrels of crude, European Brent and West Texas Intermediate (WTI), and for North American natural gas.

Moody's increased the Brent crude price assumptions it uses for rating purposes to $105/barrel (bbl) for the remainder of 2014 and $95/bbl in 2015. In North America, the ratings agency increased its price assumptions for WTI crude to $100/bbl for the rest of 2014, and to $90/bbl in 2015.

Meanwhile, Moody's increased the price assumption it uses for rating purposes for North American benchmark Henry Hub natural gas to $4.50 per million British thermal units (MMBtu) for the rest of 2014 and $4.25/MMBtu in 2015.

Moody's left unchanged its assumptions for crude prices and natural gas after 2015, at $90/bbl for Brent, $85/bbl for WTI and $4.00/MMBtu for North American natural gas.

The new price assumptions represent $10/bbl increases from the previous assumption for both WTI and Brent in 2014 and a $5/bbl increase for 2015. The revisions also represent a $0.50/MMBtu increase for North American natural gas for the rest of 2014, and a $0.25/MMBtu increase for 2015.

Moody's price assumptions represent baseline approximations—not forecasts—that Moody's uses to evaluate risk when analyzing credit conditions within the oil and natural gas industry.

Moody's periodically revises its oil and natural gas price assumptions to better calculate future financial metrics for companies in the oil and natural gas industry. The firm issued its previous price assumptions in April 2014.

Moody's price assumptions for natural gas liquids (NGLs) remained unchanged at $34 per barrel of oil equivalent (boe) in 2014, 2015 and thereafter, with a stress-case price of $24/boe, amid continued oversupply of NGLs and high levels of ethane rejection.

Under a stress-case scenario, Brent and WTI prices would both drop to $60/bbl, and Henry Hub prices to $2.50/MMBtu.

The new set of price assumptions reflects the agency's sense of firm demand for crude, even as supplies increase as a response to historically high prices. New violence in Iraq coupled with political turmoil in that general region in mid-2014 have led to supply constraints in the Middle East and North Africa. Saudi Arabia, which can affect world global prices by adjusting its own production levels, has appeared unwilling to let Brent prices rise much above $110 per barrel on a sustained basis, but this threshold has been breached with the recent turmoil in Iraq.

In North America, crude prices will stay elevated, but slightly lower than international prices as active development of unconventional oil reserves continues to boost production there. New pipeline and transportation infrastructure will continue to deliver crude more easily from producers to their downstream customers, reducing bottlenecks that have raised differentials.

Natural gas prices in North America, meanwhile, will get a continued boost from a slow refill of underground storage following a severe winter. Prices will rise sharply if producers fail to fill storage to about the 3.5 trillion cubic feet level during the refill season. The urgency of refilling natural gas storage will prop up spot prices for the rest of 2014. Still, abundant natural gas supplies will keep a cap on prices.

Power producers—the greatest market for natural gas in North America—will gradually increase their demand for natural gas, switching away from coal as new environmental regulations take effect, but natural gas prices will stay high enough to discourage near term switching.

Natural gas prices in North America will rise eventually, with demand from new petrochemical plants and the start-up of facilities to liquefy and natural gas for export, but not until later this decade.



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