Credit rating agency Moody's has increased its medium-term oil price range to $50-$70 per barrel — the range it had before the coronavirus pandemic — to reflect the expectation that the full average cost of production of a marginal barrel of oil will keep increasing in step with a continued recovery in demand.
The US Energy Information Administration (EIA) recently raised its estimates of growth in global demand, and now expects that oil demand will marginally exceed the pre-pandemic level of 101 million barrels per day (bpd) by the end of 2022, after a strong recovery to 97 million bpd in 2021.
Updated expectations from the International Energy Agency and OPEC also anticipate that oil demand will almost fully recover to its pre-pandemic level in 2022.
Moody's said the price range reflects its view of the level of oil prices necessary for producers to reinvest profitably. Since oil producers deplete their existing reserves as they generate earnings, oil prices must support reinvestment over the medium term for the industry to maintain its ever-depleting resources and support existing levels of production, as well as growth.
"The ongoing recovery in demand, rising costs and reduced levels of inventory as of September 2021 will continue to support strong momentum in oil prices. We expect that the OPEC-plus producing nations will continue winding down their production cuts in 2022, achieving a modest surplus of supply over demand by the end of 2022, shifting from a sustained deficit in 2021," the agency said in a report.
Moody's had in May 2020 reduced its medium-term oil price expectations by $5 per barrel amid a sharp drop in production and development costs based on a rapid decline in demand. It had then expected that the oil industry would need to postpone its development of higher-cost reserves until demand had fully recovered.
But an accelerated recovery in global oil demand in the third quarter of 2021 propelled oil prices into the $70-$80 per barrel range. Oil producers achieved significant cost savings in 2020-21, but production costs started to rise in step with oil demand and a broader economic recovery.
According to Moody's the industry will also need to rely more on developing higher-cost greenfield assets to meet medium-term demand, following a prolonged period of investment in lower-cost and brownfield assets that allowed the industry to hold back development costs.
