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Russian Oil Market Crisis: Prices will Remain Low
April 22, 2020 09:37


(Source: https://www.forbes.ru/biznes)
In the foreseeable future, oil prices will remain low. For Russia, this is an extremely unpleasant conclusion, since after 20 years of talk about the need to peel off the oil needle, the raw material orientation of the economy has only grown, economist Igor Nikolaev believes.

The intentions announced on April 12-13, 2020 by the OPEC + G20 countries to reduce oil production should have unfolded the dynamics of prices in the world market for growth. However,  it became clear that the expected effect did not work. May futures for WTI crude oil generally reached negative indicators.



In such a situation, the conclusion is obvious: the April agreement of OPEC + G20  did not lead to the desired result. Agreements have not even begun to be implemented, but it is already clear that there will be no result. Now the question is: could one really expect that oil prices would rise as a result of the new agreement?   The fact is that the total obligations of countries to reduce oil production still remain significantly smaller compared to the volume of falling demand for oil. No balance is being restored here. The decline in global oil demand in the second quarter of 2020 will be approximately 25 million barrels per day. At the same time, the total reduction in OPEC + G20 production should be only 6.2 million barrels per day in May, and 10.9 million barrels per day in June.

We also take into account  that, according to the Fund "The Institute of Energy and Finance", by the end of the second quarter, all oil storage facilities will be full.  The replenishment of strategic oil reserves by the United States and, possibly, a limited number of other countries only for a very short period will reduce the severity of this problem.



Obviously, all this will exert powerful pressure on world oil prices. So for some time, $ 30 per barrel will still seem to us a very good price. Russia, of course, is not happy with the current price level, because in this case, to fulfill only current budgetary obligations, trillions of rubles must be found. Of course, they are in the National Welfare Fund (as of April 21, 2020 - 12.9 trillion rubles), but now it will have to be spent on anti-crisis measures in connection with coronavirus.

Finance Minister Anton Siluanov has already said that by the end of 2020, about 7 trillion rubles will remain in the NWF.  But this is only the first year of the coronavirus crisis. Therefore, the forecast of the Ministry of Finance seems to be extremely optimistic that the NWF will have enough money until 2024.

The worst thing is that there are no prospects for restoring the previous level of oil prices. The OPEC + G20 expectations that the demand for oil will fully recover by the end of 2020 seem to be deeply erroneous. As a matter of fact, this was the main mistake of the contracting parties: everyone proceeded from the fact that demand will recover, but this will not happen.



Firstly, by the end of this year, the current coronavirus crisis is unlikely to end. Practiced quarantine measures, albeit in a limited form, are a rather long story (after all, they do not promise us a vaccine this year).

Secondly, and this is the main thing: after the coronavirus, the world economy will be different. There will be no previous demand for hydrocarbons. The current crisis is a powerful impetus for the development of remote work formats, which automatically reduces the demand for petroleum products.

The current crisis is also a strong incentive for the development of online commerce, for the development of home delivery services, etc. This also reduces the demand for petroleum products.

For all these reasons, oil prices will remain low in the foreseeable future. For Russia, this is an extremely unpleasant conclusion. Twenty years of talk about the need to get off the oil needle ended with the fact that, according to Rosstat, the raw material orientation of the economy has only grown. From 2010 to 2018, the share of mineral extraction in the structure of the country's industrial production increased from approximately 34% to almost 39%.  Such low oil prices for our commodity economy is, of course, a big disaster.



Author: Anna Dorozhkina

Tags: Russian oil Russian economy Russia international economic crisis  

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