The growth cycle of oil prices is close to completion
At the moment, the key for Russia, Brent is trading at $70.6 per barrel. This price level is about 70% higher than the parameters laid down in the “budget rule”: oil and gas revenues from oil prices above $40 (+2% annual indexation) are sent to the reserves of the Finance Ministry. Thus, at current oil prices about 70% of the “margin of safety” to the Federal budget and the ruble. In particular, if oil will become cheaper, but will remain above the level of “rules”, the budget can avoid the sequester, and the ruble – deep loosening. The fall of oil prices below the values of $40-45 per barrel could trigger a weakening of the ruble, and forced reduction of government spending.
The minimum with the 2003 values of the price of oil reached in January 2016, when Brent traded slightly above $27. Reason for declining – was established in the early 2014 a strong imbalance between the global demand and supply growth in US production due to shale revolution. For several years oil production in the US increased by a volume equivalent to 5% of the world production volume – much higher than what could “digest” the global economy.
Oil – a classic commodity with the same properties from different manufacturers. Competition in such markets is usually due to changes in prices. Thus, a strong gap between supply and demand often leads to lower prices below the cost of production of a considerable part of fields.
Existing in different formats from November 2016, the agreement OPEC+ (participating countries control about 60% of production) allowed to withdraw from the market amid a U.S. excess supply and stabilize oil prices above $50. Subsequently, the accelerating pace of global growth, the return of the sanctions against Iran, as well as deep economic and political crisis in Venezuela, just a few years reduced the volume of production from 3% to less than 1% (0.9 million barrels per day, according to Reuters, in March 2019) of the global total, prices went even higher.
However, according to our estimates, at the moment we can state the almost complete exhaustion of the listed drivers of growth. Moreover, downside risks to the global economy because of trade disputes between the world’s largest economies, US and China create the risk of lower demand for energy.
According to our updated calculations, after reaching in the 2nd quarter of 2019 at $70-72, raw materials will become cheaper. The average for the end of 2019 we expect to see the $66,5. But the effects of the “budget rule” continues to protect the ruble and the budget from pressure from the commodity market.
_____________________ Timur Nigmatullin,