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The position of Saudi Arabia, and the difficulty of tax reform in the United States will support commodity prices, and hence the ruble
In early may, oil prices have plummeted to the levels seen in November 2016 (the July futures for Brent crude fell below $47 per barrel) and the Russian ruble weakened sharply against the dollar and the Euro. Quotes dollar/ruble came close to the level 59 and consolidation above the level of 60 rubles is already considered as one of the possible scenarios for the next two months.
Now, as last year, only two factors are significant for the Russian currency — the dynamics of oil prices, and the difference in rates on ruble and dollar deposits and bonds that allows players to earn income on the interest arbitration (the so-called carry trade). With interest rates more or less clear: the difference between them will be reduced — the Bank of Russia will continue gradually declining and the fed, on the contrary, raising interest rates for at least another two times before the end of the year, which will reduce the interest of speculators against the ruble. But oil prices can expect a variety of surprises: as attempts to go to $40 before the end of may and rise to $60 per barrel until the end of June.
Threats to the ruble
Because the ruble is again perceived by the market as a commodity currency, is to evaluate the factors that could tip the balance of the oil market in one direction or another. Besides the reasons for the recent fall in the value of a barrel was enough.
First, there is a growing fear that OPEC and outside the cartel producers, including Russia, will not be able to agree on extending the freeze of production against the background of rising production of shale and conventional oil in the United States by about 800 thousand barrels. in day in comparison with last year, and also due to the sharp increase in oil production by OPEC members Libya and Nigeria.
Second, at the end of April, hedge funds 7% reduced bets on rising oil futures and started to press on quotations. The volume of open short positions (contracts for sale of oil) on the ICE Futures exchange rose for the week by 37% and now accounts for almost 80% of five-year highs.
Third, the largest oil producers Exxon Mobil, Total, BP, Chevron and Shell have adapted to the prices of $50 a barrel, reducing costs, and now, according to Bloomberg, their free cash flow is $11.4 billion, while a year ago they had a deficit of $14 billion, However, and net debt of these companies at a maximum of $210 billion, they face serious problems in terms of cheap oil and monetary policy tightening by the fed.
And finally, fourthly, the newly emerged concerns over the slowdown of the Chinese economy that have had a direct impact not only on oil prices but also on the stock of ore and metals, which also experienced a decline from 5 to 12%, which added to the negativity of the Russian stock market and strengthened the fall of the ruble in the first week of may.
Moreover, the International energy Agency has reduced by 100 thousand Barr. the forecast for growth in oil consumption in 2017, up 1.3 million barrels. a day. But this list major negative factors ends.
The chances for the bulls
On the other scale — the OPEC meeting on 25 may in Vienna, where, despite the skepticism of analysts, is expected to renew the agreements about the freezing of the volumes until the end of 2017. The oil Minister of Saudi Arabia said recently that deal on production cuts will be extended for the second half of the year and possibly beyond. As soon as information about the summit in Vienna will appear on the tape news agencies, short positions should be closed, and stock quotes oil futures blows up. Strengthened the ruble, so those who do not have time to buy depreciating to 56. dollars in April, at the end of may will be another chance, especially because until June 14, any negative change in the difference of rates of the Central banks (the second factor supporting the ruble) will not happen.
OPEC may have to extend production cuts in 2018 and to suffer for some time, the increased production of shale oil in the United States, or a successful IPO Saudi Aramco not guaranteed. Saudi Arabia has already announced that it will reduce the June delivery to Asia for 6 million barrels.
According to research by Fitch of the company owned by BMI Research, commodity giants needed oil at $55 to cash flow remained neutral. At lower prices the major oil and gas companies will have to continue to sell non-core assets and reduce capital investment. It will stop global investments in exploration and new capacity and could lead to a shortage of supply of hydrocarbons in the coming years. The increase in drilling is now observed only in the US at the same time, according to Baker Hughes, the total number of working units in the world declined in April by 3.4%.
Without the tax incentives promised by President trump, the us shale industry will not be able to return to the highs of production in 2014, the costs are high and many fields at prices below $50 unprofitable. But while the President fails to obtain the approval of their initiatives in Congress and on the most optimistic forecasts it will not happen before 2018. Here, by the way, trump statements that US monetary policy should remain soft for some time, and the dollar is weak. For commodity markets is a definite plus.
From this it follows that while we are seeing commodity markets just the usual volatility. The bulls can quickly regain lost ground, and oil will again be in the range of $50-55 per barrel.
Before the end of this year, oil and gas companies will feel quite comfortable, but the ruble will weaken slightly due to the reduction of the difference in interest rates the Bank of Russia and the fed and by the end of summer it may settle at a mark of 60 rubles per dollar. This situation will be quite comfortable for the Russian budget and economy.
Real oil “corrida” is transferred to the first half of 2018. After the beginning of the year Saudi Aramco will hold IPO, the Saudis will solve their financial problems and will be able to resume large-scale oil dumping to win back lost market share.
In 2018 will continue to rise in U.S. interest rates, reducing the fed’s balance sheet, which in combination with trompowsky policy of protectionism could trigger a new global financial crisis, but at the same time limit the further rise of China.
The Russian government in these conditions is not more than three months to finalize the program of renewal of economic growth. This fall, you must either proceed to real action, either to prepare a budget, business and the public to turbulence in the currency and commodity markets and to a new round of economic crisis, which in 2018 would coincide with the electoral cycle.
The authors ‘ point of view, articles which are published in the section “Opinions” may not coincide with ideas of editorial.