Moody's sharply lowered its oil price assumption on Tuesday by $10 a barrel for 2016 predicting that a prolonged period of oversupply would keep oil prices lower for longer.

The ratings agency lowered it price assumption for Brent crude oil the international benchmark to $43 from $53 per barrel and for West Texas Intermediate crude the North American benchmark to $40 from $48 per barrel.

Moody's said it expects both prices to rise $5 per barrel in 2017 and 2018 according to the report "Oil and Natural Gas Industry - Global: Threat of Prolonged Oversupply Drives Prices Lower".

With oil prices below Moody's forecast level its prediction may be too high. Moody's expects that US oil production could drop some. But it will be more than offset by oil supply from other regions.

"Opec oil producers continue to produce without restraint as they compete for market share exacerbating the currently saturated markets" said Terry Marshall a Moody's senior vice-president. "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."

The ratings agency said the battle to reach the bottom of oil prices continues to be driven by Saudi Arabia which is believed to have among the lowest costs of production in the world.

"Its reasons for not cutting production are viewed as its effort to cripple other substantial suppliers which include US frackers. The strategy has worked at least among small American producers as low prices overwhelm their financial resources."

But the disruption of the US fracking industry has not had an effect so far.

Moody's forecasts that global oil demand will rise by roughly 1.3 million barrels per day in 2016 an increase from its previous assumptions as oil consumption picks up in countries such as the US China India and Russia.

With a slumping economy in China Moody's may be off the mark. The world's largest oil importer may be as big a factor as the Saudis.

As a result the rating agency maintains its negative outlook on the integrated oil & gas exploration & production (E&P) and drilling and oilfield services sectors (OFS) sectors.

"The negative outlooks reflect 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" it said.

"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. "And 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 rating agency suggested that 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.

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. "And although midstream will face growing headwinds in 2016 as lower E&P spending makes its way downstream its investment in energy infrastructure will help stabilise the sector."

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