How Will Cheap Oil Affect Russian Petro Firms

By Ivan Shlygin, January 20, 2015

Oil is rapidly getting cheaper and this fact does alert the Russian government as the lion’s share of export-generated budget revenue comes from trading “black gold” in foreign markets. OGE studied current oil price fluctuations and tried to anticipate different scenarios based on how deep the oil price plunge may eventually be.

Roots of Cheap Oil

Oil prices finally started to show certain signs of stabilization after the sharp drop which began in June, according to head of the Commodity Strategies Dept. of Saxo Bank Ole Hansen, but the increase of supply in the global market makes a certain pressure on prices, while demand is rising slower than expected, and sooner or later (most probably, sooner), and a sharp reduction of output is likely to be required at some point in order to restore the balance between supply and demand.

“Starting from 2011, the global oil market has been affected by a number of geopolitical factors,” the expert says. “Some of them have a more limited impact than others, especially the war in Libya and the sanctions on Iran, which resulted in reduction of the available amount of reserves.” According to Hansen, during six months interruptions in deliveries reached an all-time high since the 1991 war between Iraq and Kuwait, but didn’t cause any price hikes. “The stability of oil prices was maintained above all by tireless efforts of non-OPEC countries (especially the United States) to step up output,” he explained.

As Hansen believes, high and relatively stable global oil prices since 2010 created a rather favorable situation for development of shale deposits and appropriate production technology. “Today, four years later, we can witness the impact of these processes on the price of ‘black gold’ in the global arena: the market has shifted from an era marked by concerns over supply disruptions to a phase of excessive supply, which triggered a sharp price drop,” the expert says.

In the future, he thinks, oil prices can stabilize and resume their growth only if current excessive supply is reduced or the growth rate of global economy accelerates, which will bring about an increase in demand for “black gold.”

“Above all, short-term oil price behavior depends on OPEC, which will convene in November in what promises to become one of the most decisive sessions in many years,” the Saxo Bank representative says. “If OPEC decides against reducing oil output (which currently exceeds 1 million barrels per day), it could put an additional squeeze on prices.”

Among other factors that could bring about an oil price slump, Hansen listed steady strengthening of the dollar, the lifting of sanctions against Iran (which could lead to a 1-million-barrel-per-day jump in global oil supply), as well as deteriorating prospects for global economy, which could result in a slower rise of demand by developing economies.

Russian Oil Firms and Weakening Ruble

Taking into account that exports account for the major part of petroleum companies’ revenues, whereas costs are quoted mostly in rubles, the situation with the declining ruble