How long will the oil crisis?
Oil market players have remembered August 2015 as a sustainable bearish trend, which is steadily supported by strengthening market positions of Iran. A few months ago the major supplier was out of the game because of sanctions. Today, this topic has already played, but the bear speculation is continuing because of so called Chinese factor.
If a growth rate of Chinese economy will slow down even more and will exceed IMF and the World Bank’s forecasts, oil prices have all the chances to test a new lower limit. This scenario is possible, if Chinese GDP will grow by less than 6.5–6.8%. In this case, Chinese consumption of raw materials will be reduced, and the oil price movement will continue to take down too.
At the moment, it does not seem possible to trace specific dynamics in the economy of the PRC. The world community is waiting with bated breath the Chinese crisis will bring down or thoroughly shaken global financial markets with new force. Such forecasts are based on a very fragile economic situation in the country and rapid drop in foreign exchange reserves.
Most of experts believe that the pressure of the Chinese factor on oil prices will continue until the end of 2016. Despite the record low prices, nobody is going to drop a rate of black gold production. The OPEC countries declared exceeding quotas. Oil exports from Russia continue to increase too. For the first half of 2015 the delivery rose by 11.8%, while export earnings fell by 1.68 times.
Logic of the Russian government is clear – Russia does not want to lose its market share. The Gulf countries and leading US companies follow the same reasoning. The national currency of Russia can’t remain on the sidelines. A powerful set of destabilizing factors reduces the ruble. Natural gas doesn’t help the ruble too. In the beginning of 2015 the gas abroad delivery fell by 4%. At the same time, low oil prices reduce gas prices.
How the Bank of Russia acts and what is to be done amid the oil crisis?
When the oil vortex started to twist, Russian bankers tried to save the situation via large-scale currency interventions. But today the tactics are hopeless. Now the Bank of Russia negotiate with exporters about increasing of currency sales within the market in steady and balanced mode.
September is a peak of payments on external liabilities for the corporate sector of the Russian Federation. The question is about 16 billion dollars. Part of these funds is already in accounts of companies but not in full. In this regard, it is easy to assume that the next steps of the Bank of Russia will be the expansion of foreign exchange supply in the market.
However, a slight ruble strengthening in August-September will not save the national currency from other factors beyond the control of government decisions. A stabilizing element is the Federal funds rate, which was left unchanged. Increasing of the rate in September would have bashed the currencies of most developing countries, including the Russian ruble — the currency depending on exports of raw materials and energy prices.
When we should expect oil price increasing and ruble strengthening?
We shouldn’t expect a bearish trend reversal on a short-term horizon. The oversupply seriously reduces oil prices. On a conservative estimate, every day it comes on the market by 800,000 barrels per day more than importers want to buy. Somebody thinks this figure has long exceeded 2 million barrels. In addition, the slowdown of Chinese economic growth increases glut of raw materials. If we assume likely recovery of China and 7% Chinese GDP growth by this year’s end, throughout 2016 the market supply of oil will still exceed the demand. Add to that lifting of sanctions against Iran and its ability to saturate the market with inexpensive oil in the amount of 500,000 bpd in the coming months and 1 million bpd within 2–3 years.
Thus, in the next 2–4 years the price of a barrel of oil is unlikely to rise above $70. That is, the ruble strengthening is not expected.
Stabilization factors of the Russian ruble against backdrop of the oil crisis
The oil factor is not alone in depreciation of the ruble. Oil and gas revenues generate only 50% of Russian budget, and dependence on hydrocarbon exports has been notably reduced. It is difficult to predict behavior of Western investors in the unstable economic situation. They want to continue cooperation, but they are afraid of introducing new sanction package. It is almost impossible to predict the essence of new restrictions and their consequences.
There is also a positive factor under these circumstances, thanks to which the ruble’s rate to the dollar didn’t drop to a number of three ciphers. The authorities have succeeded to consolidate Russian society around the problem with the course. Consistent policy in this direction has yielded some fruit.
Today it is required to keep the consolidation tendency to adapt Russian economy to the oil crisis. Today, the ruble exchange rate depends not only on oil prices, but also on people’s tranquility and businessmen’s behavior. If billions of the national currency will be converted into dollars & euro and will be moved from the country, the ruble will fall off much faster than under the influence of the oil crisis.
When and why oil will rise in price?
Despite the glut in the market, the International Energy Agency forecasts a steady increase in demand for black gold. This will happen subject to activating of the markets of Asian developing countries.
According to the expert forecast, this year oil demand may grow by 1.4 million barrels per day and by plus 1.2 million bpd in 2016. If the demand begins to catch up with the supply, even Iran with its 0.5 million will not be able to meet the needs of the market. On the other hand, the unstable situation in the middle East can make serious changes in the process of production of Iranian oil.
Next year is expected to decline oil production in the U.S., which also indicates impossibility to satisfy the projected growing demand. In fact, Iran is the only serious player in the market, which is able to increase its production volumes at the current prices. For this reason oil prices unlikely fall to a level of 20 dollars per barrel in the near future. But there is no reason to wait for $100 per barrel in 2015–2016.
According OilPrice, the price of oil could return to $60 per barrel in the next 6–12 months, even if OPEC will not reduce their quota. At the same time a slight reduction in quotas by OPEC (e.g. by 10%) can dramatically change the situation on the market and return oil prices to three-digit values. But the scenario is not favorable for Saudi Arabia. So the question of radically change the situation on the international oil market is still open.