Despite oil prices falling from a high of $114 last June to current levels, OPEC has refused to cut production, preferring instead to maintain its market share and drive out rival U.S. shale oil producers who have higher production costs.
The strategy has worked with U.S. shale oil industry witnessing the cancellation of drilling projects and weekly closures of oil rigs. Other non-OPEC members such as Russia have also experienced economic turmoil and recession caused in no small part by the decline in oil prices. Still, Russia and others have not been keen to cut their own oil output to support prices, and the glut in supply has continued apace.
With the prospect of international sanctions being lifted imminently on OPEC member Iran, which is keen to get its oil industry running at full capacity again, that glut could only worsen, Moody's said.
"The potential lifting of Iranian sanctions could add significant supply to the market in 2016, offsetting or even exceeding expected declines in U.S. production." The rating agency said this will lead "to a prolonged period of oversupply that will continue to keep oil prices low."
"OPEC oil producers continue to produce without restraint as they compete for market share, exacerbating the currently saturated markets," Terry Marshall, a Moody's senior vice president said in the agency's report.
"Russia has also greatly increased production, and the possibility that sanctions will be lifted on Iran in 2016 could flood the market with even more supply."