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“It would mean the end of Russia as an oil power”

«Это будет означать приближение конца России как нефтяной державы»

What will happen to oil prices and why Russia withdrew from the transaction OPEC+? Answers expert Mikhail Krutikhin

The second day, analysts and observers discuss “black Monday.” So the media dubbed the sharp decline in oil prices followed by the depreciation of the ruble. Why it happened and what happens next? What was the plan of the Russian government when it decided to cut a deal with OPEC? About it spoke with the analyst on oil and gas market Mikhail Krutihin.

“Russia only formally comply with the agreement with Saudi Arabia”

— Can you explain the logic of decisions of the Minister of energy Alexander Novak and head of Rosneft Igor Sechin about to torpedo the deal with Saudi Arabia? Why this was done is there some sort of calculation?

The President was allegedly presented some analytical calculations, which said that in this way Russia could punish American producers of shale oil. Due to the low prices they will be forced to curtail its activities. Russia itself, however, will be able three years or even more to stay afloat at a low cost oil at the expense of accumulated funds.

But I think it is not the main explanation. In my opinion, between Russia and Saudi Arabia to the present moment there was a conflicting attitude within OPEC. For three years Russia only formally comply with the agreement with Saudi Arabia. And in fact, increased oil production instead of reduce it. When Saudi Arabia, seeing a gigantic overhang of supply over demand, demanded that Russia participated in production cuts, the last to do so failed. She suggested one or two of the quarter to extend the previous activity diagram. The Saudis did not agree and stated that in such circumstances they cease cooperation.

«Это будет означать приближение конца России как нефтяной державы»Wang Ying/Xinhua

— This situation, some observers recalled the situation in the mid-80’s, when US President Ronald Reagan allegedly persuaded Saudi Arabia to increase oil production to drop the price and leave the USSR without hard currency. Say, this was one of the reasons for the collapse of the Soviet Union. Is it possible to draw Parallels with the events?

— This version at the time sounded even Yegor Gaidar. But I’m not her supporter. If you look back and carefully examine the details of the then relations between the US and Saudi Arabia, it becomes clear that no such conspiracy against the Soviet Union could not be. I am sure that this version does not hold water. The current situation is quite different from the one.

— Back to the question of shale oil. If we accept the version that the violation of agreements with the Saudis was the result of a desire to harm the United States, it is Russia really?

— I am inclined to exclude the intent to harm Americans. Even if he really was, then he’s obviously stupid. Us shale companies can stop the production of shale oil, and quickly resume. Not all of them will get hurt even at 25 dollars per barrel. Indeed, from the behavior of Russian oil, the industry may slow down a bit, but the disaster will not happen there for sure.

“The Saudis will get more benefits by implementing large amounts of for a lesser price”

— Some experts argue that this step is the most she anything terrible does not threaten. The Finance Ministry said the country has enough money to fulfill all social obligations for 6-10 years, even with the stabilization in oil prices of 25-30 dollars per barrel. Although there are calculations which say that the budget will be balanced only if the price of oil not below $ 42 per barrel. So who to believe? Will Russia be able to prosper further when it collapsed in oil prices?

— There is a forecast of the budget of the Russian Federation for the period up to 2036. This document is published on the website of the Ministry of Finance in April 2019. There is analyzed the Federal budget in various price Urals. If you take the 25 dollars per barrel, and this is the real price in the future, and this price will last for a year, then 2.4 per cent of GDP — down. If it will last five years, then GDP will disappear 13%. That is, GDP will inevitably shrink, and it’s not my calculations, and the Ministry of Finance.

The national welfare Fund already uncorked. The price of oil is already below the cutoff point. And the difference, not enough to 42.4 per dollar, which is required for a balanced budget will be replenished from our sovereign Fund. How much it will last is difficult to say. The appetite of large companies for the implementation some projects cannot be measured. Already lined up to receive funds out of the capsule.

We have the oil industry, means the remaining reserves of oil. Of these, only 30% is commercially recoverable, the rest are tight. The oil should cost $ 70-80 per barrel, so it actually cost to produce. But if the oil price will be even lower than before the last crash, then it turns out that we do not have 30% of commercially recoverable oil and 15-20%. It will mean the end of Russia as an oil power. Last year, the Ministry of energy predicted that by 2035 we will lose 40% of annual oil production volume, since deteriorates the quality of the stocks. Now, I think it will be close.

«Это будет означать приближение конца России как нефтяной державы»Russian energy Minister Alexander Novak at the meeting with colleagues in ОПЕКMinistry of Energy of Russia/via

— What is the motivation of the Saudis? They are, then why take this step? Just to show their power to Russia? They, too, will be hurt by lower oil prices.

— The price of oil in 50 dollars for barrel are not satisfied with Saudi Arabia, it will not allow them to form a balanced budget. They hoped to sell less oil by volume, but at a higher price by reducing production. They calculated how much they will receive from such a scenario. Then they considered what would happen if you let go of the reins and produce as much oil as they can, to fight for market niches to push competitors to do the discount. And it turned out that the Saudis will get more benefits by implementing large amounts at a lower price. Even more than from the agreement of OPEC+. Why the Saudis actually have nothing to lose. Yes, they have temporary setbacks, such as the sagging value of their company, Saudi Aramco. But in the long run they won’t be the loser.

“For the population, the devaluation of the ruble means inflation is inevitable”

— Then what is your forecast for price of oil? Someone claims that it is long and soon all will be back to $ 40 per barrel.

— To make predictions — it is a crazy occupation. But I can say that now two factors will determine the situation on the oil market. Factor № 1. Over the next years the offer will exceed the demand. A fundamental indicator of this balance will put pressure on the price of oil. Sentences will be higher and the market niche they will fight and bring down the price. Factor № 2. We know that the price of oil, which we see in the graphs is not determined by this balance, and the behavior of financial market participants that trade futures, forwards, spreads and other derivatives from crude oil prices. There is drawn a lot more papers than real oil. And by market participants is beneficial not high and not low prices, and volatility. The price goes up, price goes down — in any case they make money.

That is, on the one hand, we have the overhang of supply over demand, and on the other end we will have regular games on the volatility of the financial market. If you will analyze these two points, you will be able to predict the price of oil.

«Это будет означать приближение конца России как нефтяной державы»Stefan Sauer/dpa

— If you read social networks and online media, the Russian society is now in a panic from what was happening in the oil market. But is there any real reason to panic for the wider society? Isn’t this relates primarily to oil companies? The country has a huge number of poor who have no savings. So seriously for the impact of falling oil prices?

— Yes, it applies primarily to oil companies. They will benefit from the devaluation of the ruble, but they will lose due to the reduction of recoverable reserves. But once the ruble will lose its value, they, paying in Russia, will make a profit in hard currency. For oil companies this ambiguous situation.

But for the population, the devaluation of the ruble means inflation is inevitable and unavoidable rise in the cost of all imports. And Russia is heavily dependent on imports ranging from food to industrial and household appliances. The audience will see the appreciation of all associated with imports. This is bad and will certainly affect the contents of the wallets of people, even if they are not rich and to postpone it is nothing special.

© 2020, paradox. All rights reserved.

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