Following the unexpectedly sharp drop in global oil prices, the cost of Russian Urals oil is also falling. It may even drop below $60 per barrel at Russian ports. Why have oil prices declined, can we talk about an era of low prices, and how will the Russian budget cope with this situation?

In the last two trading weeks, global oil prices for Brent have fallen significantly from $80 per barrel, a total drop of 10%. This has not happened in a long time. This week, the price even dropped below $70 per barrel, the first time since December 20, 2021. In the last two days, the price has started to rise, which can be explained as a technical rebound, according to Nikolai Dudchenko, an analyst at FG "Finam."

Naturally, Russian oil prices for Urals have also dropped. Its price in the Baltic port of Primorsk and the Black Sea port of Novorossiysk on Tuesday was below $60 per barrel, that is, below the ceiling, Bloomberg reported, citing Argus Media data. However, according to Dudchenko, Urals prices are currently around $65 per barrel.

Meanwhile, Sergey Tereshkin, CEO of the oil products and raw materials marketplace Open Oil Market, also does not rule out a correction of Urals prices to less than $60 per barrel, considering the Urals discount to Brent at $10 per barrel by August 2024. This, by the way, is the minimum discount since the beginning of the year: at the start of the year, the discount was $16, the expert adds.

The drop in Russian oil prices poses risks to budget revenues. The IEA has calculated that Russia's oil and petroleum product exports in August were at their lowest level since March 2021, falling by 290,000 barrels per day compared to July, to 7 million barrels per day. Revenue fell by $1.6 billion, down to $15.3 billion.

What happened to oil prices? "There are no very strong fundamental factors that could explain such a sharp price drop, in our opinion. However, there are also no fundamental reasons for the market to increase long positions. Accordingly, the absence of any 'support' combined with speculative trades, apparently, served as a trigger for mass sell-offs," says Dudchenko.

"Oils prices have decreased due to several reasons, including concerns about a recession in the U.S. and reduced demand for energy resources in China, as well as a relative temporary lull in the Middle East," says Alexander Shepelev, a stock market expert at BCS World of Investments.

"The recovery growth in demand has exhausted itself, coinciding with OPEC+'s plans for gradual production increases. Participants in the deal planned to increase quotas from October 2024, but the market started reacting to this news in advance. Additionally, signs of a slowdown in U.S. manufacturing affected the market: the PMI Manufacturing Index, which reflects the state of the manufacturing sector, was below 50 points for the second month in a row as of August. Along with a slowdown in the Chinese economy, this caused an overly nervous reaction in the market and a significant correction in oil prices," explains Sergey Tereshkin.

The market is already fearing that this price drop might signal the beginning of a new era of low oil prices. However, the experts surveyed are still more optimistic.

"We believe that this drop in oil prices is mainly due to speculative factors. Moreover, the market underestimates the actions of OPEC+ and geopolitical risks. Therefore, the likelihood of oil prices rising in the fourth quarter of this year is still higher than the likelihood of a decline," says Nikolai Dudchenko.

"OPEC participants are not interested in further price declines. If the price of Brent remains below $70 per barrel, OPEC leadership may resort to verbal interventions, and if that doesn't work, they may take concrete actions," believes Alexander Shepelev. Additionally, he adds, oil prices could rise due to various factors, such as local accidents, logistical bottlenecks, weather disruptions in oil and gas regions, and more. Moreover, the market may be underestimating the role of geopolitics, which may bring further surprises, including in the Middle East, says Shepelev.

The drop in oil prices, as well as the reduction in oil and petroleum product exports, will inevitably impact budget revenues.

"A drop in the price of Urals to below $60 per barrel poses risks to oil and gas revenues, even though oil production has plateaued. In August 2024, according to EIA data, oil production in Russia reached 9.02 million barrels per day, which is close to Russia's current OPEC+ deal quota," says Sergey Tereshkin.

Meanwhile, it is primarily the petroleum products that play the main role in the decrease of oil and petroleum product exports. According to Platts, Russia's seaborne oil exports even increased by 130,000 barrels per day in August, to 3.36 million barrels per day, while seaborne petroleum product exports decreased by 220,000 barrels per day, to 2.09 million barrels. In addition to the OPEC+ deal, the forced downtime at refineries is also contributing to reduced production and export of petroleum products, Tereshkin explains.

However, experts believe that the situation with oil and gas budget revenues does not look critical at the moment.

"The situation with oil and gas revenues is not critical at the moment. Over the first eight months of the year, the Russian budget received 7.6 trillion rubles in oil and gas revenues. About 3.3 trillion rubles remain to be earned, which still looks like a feasible task. Of course, this assumes that oil prices will not continue to fall," says Nikolai Dudchenko.

At the same time, oil prices could rise again if market fears are not realized and risks do not materialize. Furthermore, Shepelev notes that the second half of the year is typically not favorable for the ruble, and this time is unlikely to be an exception.

"We expect the dollar to reach about 95 rubles by the end of the year. A weaker ruble will support export revenues to the budget," says the expert.

"Despite the drop in prices, a serious collapse in oil and gas revenues is unlikely, as both the actual Urals discount to Brent and the fixed discount used by the Ministry of Finance in tax calculations ($20 per barrel) are now significantly lower than at the beginning of 2023, when the Urals discount to Brent reached $30 per barrel," concludes Sergey Tereshkin.


Translated using ChatGPT

Sourse: https://m.vz.ru/economy/2024/9/13/1286895.html