A prolonged period of oversupply will keep oil prices lower for longer and continue to pressure issuers in the oil and gas industry in 2016, particularly those in the exploration & production (E&P) and drilling and oilfield services sectors (OFS), says Moody’s Investors Service. As a result, the rating agency maintains its negative outlook on the integrated oil & gas, E&P and OFS sectors.

The negative outlook reflects further threats that would compound the current oversupply, which include increased oil exports from Iran in 2016 and the prospect of lower demand from China, the world’s largest consumer of commodities, as its economy slows.

“Low commodities prices and uncertainty about the pace of their recovery will continue to limit exploration and production activity in 2016, leading to spending cuts, stalled production growth and volume declines,” said Steve Wood, Moody’s Managing Director of the oil & gas team, “these cuts will in turn lead to lower revenue for drilling and oilfield services companies, which will face persistent equipment overcapacity and need to minimize capital expenditures just to operate near break-even cost levels.”

The integrated oil and gas sector will also need to further cut capital expenditures in 2016 despite a 20 per cent cut in 2015, as the sector will have negative free cash flow through the next year, according to “Oil and Gas – Global: 2016 Outlook – All Regions and Sectors Facing Lower-for-Longer Environment.”

However, Moody’s maintains its stable outlook on the refining & marketing and midstream subsectors.

Growth will flatten in the refining and marketing sector and slow in midstream, but remain in positive territory. “North American refiners have a structural advantage and will benefit from better profit margins from turning crude oil into refined petroleum products,” added Wood, “although midstream will face growing headwinds in 2016 as lower E&P spending makes its way downstream, its investment in energy infrastructure will help stabilize the sector.”