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Strong oil prices support North American Energy Complex in 2014

Hydrocarbon Engineering,

The rating outlook for North American oil and gas companies is stable for 2014, according to Fitch Ratings.

A sharp downturn in global oil demand resulting in a significant sustained drop in crude oil prices (US$ 65/bbl or less) would trigger a negative sector outlook, especially if capex budgets remain sticky due to issuer expectations of a quick rebound.

However, Fitch Ratings holds that strong oil prices will continue to support the energy complex in 2014. West Texas Intermediate (WTI) is expected to average US$ 90/bbl next year and it is anticipated that capex budgets will continue to outpace cash flows generated from operations as upstream producers respond to high prices and the opportunity for strong returns.

The natural gas market will also continue to stabilize in the short term. Production has increased modestly over the course of 2013, having remained flat for the majority of 2012. Pricing has also stabilized, although at reasonably low levels in comparison to the historical range.

Fitch has projected that demand will increase leading into 2016; LNG exports and petrochemical expansions will support increased demand growth and potentially higher prices, dependent upon the extent of the supply response.

In the downstream

Crude oil spreads narrowed in 2013, reducing windfall profits for refiners with location advantage. This served to highlight the importance of traditional drivers of profitability.

Fitch anticipates that there will continue to be periods of mismatch between domestic production growth and take away logistic capacity, hence crude spreads will remain volatile in 2014.

Meanwhile, discounted and cheap natural gas should ensure that US refined product exports remain competitive.

Adapted from a press release by Emma McAleavey

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