Moody's Investors Service increased on Thursday its oil price forecast for the medium term to the $50-$70 a barrel range, returning to its outlook from before the pandemic, on the back of expected restraint in production growth and a rise in costs in step with growing demand through 2024.
"We are now returning to the medium-term price range we had before the coronavirus pandemic as we expect the cost of production to continue to rise in step with recovery in demand. We also expect that restricted supply will continue to support strong momentum in oil prices," Moody's Senior Vice President Elena Nadtotchi said in a statement.
Underinvestment in supply will be a key theme in the oil market in the medium term, as exploration and production (E&P) companies continue to keep disciplined spending on new supply and are expected to continue doing so in 2022 as well.
The upstream sector still shows capital spending restraint, which will limit production growth in 2022, when demand is set to continue recovering and even exceeding the pre-pandemic levels, according to Moody's.
The restricted supply that will come from muted upstream investments is expected to support the strong pricing momentum in the medium term, the rating agency said.
"Our analysis demonstrates that upstream companies will need to increase their spending considerably for the medium term to fully replace reserves and avoid declines in future production," Moody's Vice President Sajjad Alam noted.
Analysts at Moody's also said today that global annual upstream spending needs to increase by as much as 54 percent to $542 billion if the oil market is to avert a supply crunch in the medium term.
Underinvestment in upstream projects is a major wild card for oil markets going forward, analysts and industry officials say.
The oil industry is "massively underinvesting" in supply to meet growing demand, which is set to return to pre-COVID levels as soon as the end of 2021 or early 2022, Greg Hill, president of U.S. oil producer Hess Corp, said last week.
By Tsvetana Paraskova for Oilprice.com
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