Brent crude to average US$55 per barrel in 2015, says Moody’s

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KUALA LUMPUR (Jan 16): Moody’s Investors Service has lowered its price assumprions for the European Brent and West Texas Intermediate (WTI) crude oils, due to tumbling oil prices.

In a report Jan 15, Moody’s revised its assumptions for average spot prices for Brent crude to $55 per barrel through 2015, to $65 per barrel in 2016 and to $75 in the medium term, and for WTI crude to $52 per barrel in 2015, to $62 per barrel in 2016 and to $75 in the medium term.

Moody’s said industries for which fuel was a direct and significant cost would see a positive effect from lower oil prices, as will consumer-dependent businesses more generally, since lower gasoline prices mean consumers will have more cash to spend on other items.

However, the report entittled "Global Corporate Finance: Airlines, Packaged Food, Shipping Get Biggest Lift from Oil Price Plunge" said oil and gas exploration and production companies, and the companies that supply them, will be hurt by lower crude prices,

Moody’s Managing Director Steve Wood said that at the start of 2015, crude prices of about US$50 per barrel reflected factors including growing non-OPEC supply, supply outpacing demand worldwide and Saudi Arabia's decision not to keep acting as OPEC's swing producer.

"While we see no catalysts that would change the supply-demand equation in the near term, our long-term oil price assumptions reflect our view that prices will eventually rebound,” said Wood.  

According to the report, airlines, shipping and packaged foods are among the business sectors that will benefit most from lower oil prices, while the oil exploration and production and oilfield services sectors will bear the brunt of the collapse.

Meanwhile, a Moody’s vice president Jonathan Root said passenger airlines' financial performance will improve in 2015 as a result of lower fuel costs.

"American Airlines should realize the maximum benefit, but Delta, United, Lufthansa and Air Canada will also be among those that gain."

Conversely, the suppliers of aircraft and components could suffer as falling prices increase the risk of order cancellations and deferrals down the supply chain, said the report.  

A Moody’s senior vice president Russell Solomon said that oil prices had fallen to a level that significantly reduces the operating cost benefits airline customers will realise from new fuel-efficient aircraft on order compared to when orders were placed, when Brent crude averaged more than US$80 a barrel.

"As a result, we expect order deferrals and cancellations to increase beyond the bump that has recently been anecdotally noted,” said Solomon.

The report said sustained lower prices would also boost the margins of processed food manufacturers such as Nestlé, Mondelez International and Kraft Foods, which spend 10%-15% of the cost of goods on freight and fuel.

It said these companies should also see sales increase as cheaper oil leads consumers to spend their extra cash on discretionary food items.

“Restaurants will likely benefit for the same reason, though not as dramatically, with quick-service outlets such as McDonald's and Wendy's benefiting from lower-income consumers, who tend to see the biggest increase in their disposable income when gas prices are low,” it said.

Moody’s said falling oil prices will be modestly positive for automobile makers.

It said that in North America, demand will shift toward larger, higher-margin vehicles such as SUVs at the expense of smaller, more fuel-efficient models.

Sales should improve for companies including General Motors and Ford.

“But sales aren't likely to improve much in the saturated Japanese market, and since motorists there don't drive as much on a daily basis as they do in the US, they are less likely to shift to larger cars.

“Additionally, high taxes in both Japan and Europe are likely to blunt the impact of cheaper crude on car sales,” it said.