Oil well with the pump jack in action. Alberta

Energy prices are likely to be volatile in the year ahead as a result of concerns about oversupply and macroeconomic factors dampening economic growth, according to a new report from Moody’s Investors Service Inc.

The key issue for the energy sector in the year ahead will be whether OPEC and Russia adhere to their promised production curbs, the credit-rating agency says. Moody’s expects that prices for the primary North American benchmark, West Texas Intermediate crude, will be in the US$50-US$70 a barrel range, with North American natural gas averaging US$2.50-US$3.50/MMBtu.

“Market expectations for continued strong oil demand growth remain in place despite concerns about slowing demand growth as a result of weaker economic growth, the impact of tariffs and a strong U.S. dollar,” said Steve Wood, managing director for oil and gas at Moody’s, in a statement. “Very high Saudi and Russian production, in particular, has heightened supply volatility, so whether OPEC and Russia maintain production discipline and renew agreements to limit output are key concerns going into the new year.”

Against this backdrop, Moody’s says that investors in both exploration and production companies “will continue to wait for better returns in 2019.” The credit-rating agency says that the industry’s capital efficiency has improved, but that infrastructure constraints have boosted transportation costs.

“In North America, wide differentials for regional oil and natural gas will narrow as infrastructure coming into service in late 2019 and 2020 eases bottlenecks in the Permian Basin, western Canada and other regions, relieving stress on commodity prices,” Moody’s says. “Meanwhile, the Mexican energy sector faces risks from factors including a new government policy that shifts PEMEX toward refining and away from oil production, and Asian national oil companies contend with risks from volatile commodity prices, rising shareholder returns and evolving fuel-price regulations.”