December 10, 2008
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Home / Issue Archive / 2008 / September #9 / RTS bets on $50 per barrel oil

№ 9 (September 2008)

RTS bets on $50 per barrel oil

Equity traders on the RTS (Russian Trading System) seem to be betting that crude oil will fall as low as $50 per barrel, according to an analysis offered this week by Chris Weafer, Chief Strategist at Uralsib Bank.

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RTS bets on $50 per barrel oil

Equity traders on the RTS (Russian Trading System) seem to be betting that crude oil will fall as low as $50 per barrel, according to an analysis offered this week by Chris Weafer, Chief Strategist at Uralsib Bank.

The graph above tracks the price of oil (Urals) and the RTS Index since the start of 1998, the year that Russia had its last post-Soviet financial crisis. Weafer offered the following analysis:

On July 11th this year Urals closed at $139.97 p/bbl and on that day the country earned about $1.3 bln from hydrocarbon exports (crude, products plus gas). On July 12th the correlation was re-established. Today, with Urals in the mid $80’s p/bbl, the export earnings will be $400 mln less.

The current level of the RTS (mid day Monday) implies an oil price of $50 p/bbl.

That is $20 p/bbl below the critical level for the federal budget. At that level all bets are off in terms of the investment case for Russia. Our Chief Economist, Vladimir Tikhomirov, estimates GDP growth at around 3.4%, real income growth at 2.8-3.5% and the ruble-dollar rate close to 27.0.

The message being that investors in oil economies often find reasons to ignore the price of oil - but usually that comes back to bite. Russia is an oil story and will remain so until the economy can achieve meaningful diversification and the dependency on oil & gas taxes falls significantly lower than the over 50% level it is today.

The long-term average price of Brent crude is $29.65 p/bbl (30 year). In the two decades up to the millennium it was $20.5 p/bbl while since the start of the millennium it has averaged $48.3 p/bbl. This year, to date, Brent has averaged $111.1 p/bbl while Urals is averaging $107.3 p/bbl.

On the negative side is the rising dollar, the slowing economy and general demand destruction.

On the positive side is the fact that countries in the Gulf will face even greater economic turmoil than Russia sooner while Saudi Arabia risks a return to the social instability and threat of Islam radicalism of 5 years ago. It needs to keep social spending high. Its budget balances close to $80 p/bbl. Places like Dubai and Iran also need a high price for economic reasons. Iran faces presidential elections in 2009. OPEC is in a better position to control production and prices from next year because there will be less competition from financial investors and no new supply sources
 

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