In January, oil prices decreased. In particular, the ICE Brent opened at $38.59/b and closed at $35.89/b, while NYMEX WTI opened at $38.06/b and closed at $33.75/b. On January 20, both oil quality prices reached their minimum since December 2003, respectively $28.55/b and $28.26/b. During the last 10 days of the month, prices recovered due to the rumors dealing with a possible agreement between OPEC and the Russian Federation aiming at a common cut in oil supplies.
Throughout the first month of 2016, the €/$ exchange rate steadily traded at around 1.08 dollars per euro. On January 21, as a direct consequence of the fall in oil prices, the rouble reached its new lowest since December 2015, against both the dollar (1$/84.2 roubles) and the euro (1€/91.7 roubles).
According to Sergio Squinzi, the President of the Italian Manufacturers’ Association, the current €/rouble trend is an obstacle for our exports and the Italian government should lift the sanctions that are still in place against the Russian Federation.
Latest data and estimates on oil and gas
Currently in the oil market, there is an oversupply of 1.0/1.5 million b/d. Iran, now relieved of the sanctions, could offer 300 thousand b/d of additional crude by the end of the first quarter of 2016. However, in December 2015 for the first time since September 2012, the non-OPEC production has slightly decreased in comparison with the year’s earlier levels, while the OPEC output of 32.28 million b/d remained close to the the Cartel’s production ceiling.
According to the data provided by the International Energy Agency on January 16, the outlook for 2016 has demand growth moderating to 1.2 million b/d thus supply is expected to exceed demand by 1.0 million b/d.
At present, US crude production is estimated at around 9.2 million b/d but the unconventional oil & gas output have been decreasing in conformity with the EIA Drilling Productivity Report. Adam Sieminsky, administrator of the US Energy Information Administration, stated on January 19, that the 2016 US crude production is forecast to decrease by 700 thousand b/d (7%), to 8.7 million b/d, after the 8% increase in 2015 over 2014, that was the highest rate since 1972.
Political and economic assessments
Despite the fact that Saudi Arabia and its allies in OPEC (Kuwait, Qatar and United Arab Emirates) are clearly acting directly against the interests of half the Cartel and their national budgets have been suffering big losses, the very risky Saudi-led strategy of maintaining low prices thanks to their lower costs of production is gaining ground. Indeed, the non-OPEC output has started decreasing. The Iranian Oil Minister, Mehdi Asali, expressed concerns about this situation stating, “for the oil market this is [the oversupply] the highest threat in the short term‘.
In spite of the fact that in 2015 the American frackers reduced their extraction costs by 40% and the well productivity increased by 48%, the US unconventional output seems to be only at the beginning of its nightmare too. Wolfe Research forecasts that approximately 1/3 of US enterprises that pump crude might appeal to Chapter 11 before mid-2017 if the oil does not recover to $50/b. Other estimates are even worse: Fadel Gheit, senior oil and gas analyst at Oppenheimer & Co., stated on CNBC “that half of the current producers have no legitimate right to be in a business where the price forecast, even in a recovery, is going to be between, $50/60/b and they need $70/b oil to survive‘.
Taking into account that American oil and gas producers, according to Bloomberg, are expected to announce losses totalling over $15 billion in 2015, the hope is that Nouriel Roubini will be proven wrong when he states that the new world financial crisis could be detonated by the US tight and shale company busts.
Moscow's turning point
The decision by the US Federal Reserve to raise rates in December 2015 for the first time since the beginning of the financial crisis and in addition to the previous end of the quantitative easing monetary policy program, seems to have marked the start of the strong dollar era. Even though dark clouds are looming on the American Central Bank willing to raise the interest rates again during the next months; these factors have directly affected the fall in oil prices, which pose new challenges for the Russian economy in 2016.
In the short term, the macroeconomic trend of the Russian Federation is still stable thanks to the $368 billion reserves of the Central Bank and the 2 national Funds, whose liquidity respectively, total $70 and $80 billion. Furthermore, after the revision of the public spending (except the military expenditure), the deficit/GDP ratio is under 3%. Finally, the fall in oil prices is partially counterbalanced by the depreciation of the rubble – that means a reduction in majors’ costs – and the simultaneous appreciation of the dollar, which allows higher revenues for the producers and the Russian State too. On the contrary, the real risk is that the depreciation of the national currency will lead to a higher inflation thus, a reduction in the purchase power and also in consumptions, preventing the Russian government to achieve the 2016 inflation targeting of 6.4%, after the approximately 12% reached in 2015.
In the medium term, besides the uncertain financial stability of the projects that are still in place, the Russian Federation must face the issues clearly pointed out by Gherman Gref. The President of the most important Russian public bank declared that Russia “has failed to adapt to economic and technological changes and has fallen into the ranks of ”downshifter’ countries, where the most terrible export, and the largest export, which must be stopped, is the export of brainpower‘. Actually, because of a fall in oil prices from $50/b to $30/b, the Russian Federation, which extracts 10 million b/d, loses $200 million/d or $70 billiona year. This is an amount equal to one of the national Funds.
The Kremlin should not overestimate the statement made by Sergio Romano, former Italian representative to NATO and Ambassador of Italy in the Soviet Union during the ’80, who believes that Vladimir Putin is right when he declares that the North Agreement Treaty Organization doesn’t make sense anymore.
Despite the legitimate auspices of the Russian Energy Minister, Aleksandr Novak, the Russian government does not rely too much on the possibility that OPEC will soon call an extraordinary meeting with the objective of reducing the oversupply in the oil market in accordance with the non-OPEC producers. If this happens, which political request will the Saudis ask for in exchange?
The Russian Federation should probably accelerate bringing into trade its oil benchmark - the Urals - which will be traded in roubles. Actually, the Russian Federation is able to mitigate the negative effects of low barrel prices and sanctions by increasing Chinese oil exports.
In conformity with the data from RBC Capital Markets, the Saudi share of Chinese crude imports was about 20% at the beginning of the decade, while Russia’s was below 7%. According to Austria’s Junge Welt, Saudi oil supply to China decreased from 55 million to 50 million tons in 2014, while the supply of Russian crude surged by 36%, to reach 42 million tons.
However, this data is only a small view of the developing partnership in trade, energy, diplomatic and military cooperation between the 2 United Nation Council member States.