S&P Global Ratings regularly publishes price decks for specific commodities, such as hydrocarbons and metals. These inform our ratings analysis of corporate, sovereign, local and regional government, and project finance issuers. They are also inputs for our economists' macroeconomic forecasts. Here, we explain how we derive our price assumptions and how they inform our analysis of issuers, whether they are producers or consumers, that have an exposure to commodities such as crude oil and natural gas or base, precious, or bulk metals.

We will discuss the updates to our hydrocarbon price deck in a webinar on April 25, 2023. Click here to register (or copy and paste the website address into your browser):

https://event.on24.com/wcc/r/4199145/4E3A745FF23811DF23CC1A0C854C5578?partnerref=article

Frequently Asked Questions

How does S&P Global Ratings formulate its price assumptions?

To formulate our base case oil and gas, and metals price assumptions, we may use market-based indicators or data from other S&P Global divisions or other market experts. We also consider qualitative factors derived from our own analysis and company insights.

Hydrocarbon base-case prices:  For crude oil and natural gas, S&P Global Ratings uses price forecasts from our affiliate S&P Commodity Insights (for example, for West Texas Intermediate, Brent, and Henry Hub) as a starting point for the formulation of our price deck. To the extent that we consider appropriate, S&P Global Ratings adjusts these to establish final price assumptions that reflect our own independent view. Adjustments are also used to determine price assumptions that may be specific to a product, region, or company. We base our price relationships on historical and expected correlation analyses, commonly referred to as basis differentials. Examples include other grades of crude oil (such as Maya or Light Louisiana Sweet), natural gas liquids (such as propane and butane), or natural gas trading at different geographic hubs.

Metal base-case prices:  To derive our near-term price assumptions for most metals, generally year one and two, we primarily use the relevant futures curve, given the depth and liquidity of these markets. Although a futures curve is not necessarily an accurate predictor of future spot prices, it reflects market consensus at a given point in time.

In the longer term, future markets become less liquid and are a less reliable predictor of future spot prices. Therefore, our longer-term assumptions for year three and beyond rely more on fundamental analysis. As such, S&P Global Ratings' long-term price assumptions will often trend upward when near-term prices reflect trough conditions and trend downward when near-term prices are at cyclical peaks. We incorporate our best estimate of supply-and-demand drivers, including inventories, output, demand, and spare capacity, as well as cost curves and drivers. In doing so, we often consider data and forecasts from our affiliates, S&P Global Commodity Insights and S&P Market Intelligence, as well as external resources.

For price assumptions on base and precious metals, and for coal, we use actively traded futures on established and relevant benchmarks such as those from the London Metal Exchange (LMEX), and New York-based Commodity Exchange Inc. (COMEX) as a starting point.

How does S&P Global Ratings use these price assumptions?

Corporates:  Typically, our forecasts for corporates focus on the current year (year one) plus the next two years. We use these to determine a base-case financial scenario for issuers.

As described in paragraph 124 of our "Corporate Methodology," published on Nov. 19, 2013, if we anticipate that cash flow may deviate materially from base-case levels through the cycle, we may adjust down the preliminary cash flow/leverage assessment that results from our base price assumptions to arrive at our final cash flow/leverage assessment. For example, during a period of high prices, a preliminary assessment of minimal might be adjusted to modest or intermediate, if we consider that minimal might not be sustainable in a lower price environment. To assess whether this is appropriate, we may consider historical variations, run a sensitivity analysis, or run a scenario using midcycle price assumptions; the latter may be especially relevant for investment-grade ratings. To estimate the midcycle prices used in our ratings analysis, we typically use fundamental analysis of supply-demand balances and industry cost curves.

Sovereigns and local and regional governments:  The time horizon for our forecasts is usually longer for sovereign and local and government entities. When rating a sovereign, we use all four years of the relevant price deck assumptions and, if needed, may apply an additional year.

Project finance:   Our "Sector-Specific Project Finance Rating Methodology," published on Dec. 14, 2022, specifies how we derive our baseline price assumptions. For commodity and natural resource projects, this will include parts of the price deck, transitioning to midcycle prices for longer-term forecasts. When extending midcycle prices over the remaining life of the project, we will generally adjust them for inflation.

In addition, we determine downside stress price scenarios that simulate the business cycles relevant to the specific market and product. These are typically based on worst sustained conditions in recent representative economic cycles. If relevant, we may adjust the scenarios to factor in expected secular, technological, or fundamental changes to market dynamics.

How often does S&P Global Ratings review its price assumptions?

Typically, we review our corporate and sovereign commodity price assumptions quarterly (see "S&P Global Ratings' Metal Price Assumptions: Short-Term Fundamentals Remain Favorable Despite Volatile Conditions," published on April 10, 2023). Given the volatility and unpredictable nature of commodity prices, we may also update our assumptions more frequently. We make changes to our assumptions to account for changes in market indicators and our view of fundamental supply and demand. If the futures curve shifts, and differs by at least 20% from our assumptions, we may review our price assumptions to determine if we consider the difference to be persistent and relevant from a credit perspective.

Which aspects of S&P Global Ratings' rating analysis are influenced by its price assumptions?

Corporates:  We use our price assumptions to establish our base-case financial projections for companies where hydrocarbon and/or metals prices are a key factor. For example, they may affect our view of base-case revenue, EBITDA, cash flow, and credit ratio projections. These outputs contribute to determine the preliminary financial cash flow/leverage assessments. For commodity-related entities where we assess the cash flow profile as volatile or highly volatile, we may adjust down our preliminary assessment to derive a final cash flow/leverage assessment, depending on how our base-case assumptions compare with our view of where we are in the cycle.

We may also use our base price assumptions to estimate input costs for consumers of commodities, such as transportation companies, downstream manufacturers of rolled products, power generators, and other manufacturers.

Where appropriate, our forecast includes issuer-specific production hedges, contractual price arrangements that differ from market prices and, specifically for oil and gas companies, realized (or "well-head") prices. These may differ from benchmark prices because of quality differentials or regional variations in supply and demand.

Sovereigns and local and regional governments:  S&P Global Ratings' hydrocarbon and metal price assumptions provide important inputs for assessing the creditworthiness of sovereigns and local and regional governments (LRGs), particularly those where the production and sale of hydrocarbons and related products account for a large share of GDP, government revenue, or export revenue. They also provide key inputs where imports of hydrocarbons and metals account for a significant share of total import payments or of government spending.

Hydrocarbon and metal price assumptions can affect sovereign and LRG credit analysis through various channels:

• Economic data: GDP, GDP growth, and the structure of the economy;
• Public finances data: Budget balances and, in the longer term, levels of net government debt; and
• For sovereigns, the level of foreign exchange reserves, external accounts (specifically, the balance of payments) and, over the longer term, the international investment position.

Furthermore, volatility in hydrocarbon and metals prices can create volatility and distortions in trade, government finances, and economic performance, thus introducing additional risks. The ultimate implications of the above factors for sovereign and LRG creditworthiness are detailed in our sovereign and LRG rating criteria.

Project finance:  Numerous issuers depend on oil, natural gas, or metals. For issuers such as power generators, petrochemical facilities, and methanol producers, it is a feedstock. Others, such as liquefied natural gas facilities and mining and extraction projects, sell commodities directly.

To rate project finance issuers that use commodities and process natural resources, we determine base-case hydrocarbon or metal prices over the life of the financing or asset--this is typically 15-25 years. We also determine downside prices to stress the resilience of a project.

Base and downside price assumptions are used to determine a project's cash flow volatility, and thus its market risk and business assessment during the operations phase. The baseline price assumptions are also used to determine the financial assessment, through the minimum debt service coverage ratio (DSCR) ranges. Finally, downside prices are a key input to our resiliency analysis.

Related Criteria And Research

Related criteria

• Sector-Specific Project Finance Rating Methodology, Dec. 14, 2022
• Corporate Methodology, Nov. 19, 2013

Related research

• S&P Global Ratings' Metal Price Assumptions: Short-Term Fundamentals Remain Favorable Despite Volatile Conditions, April 10, 2023
• FAQ: How S&P Global Ratings Formulates, Uses, And Reviews Commodity Price Assumptions, Sept. 28, 2018