Oil as a factor of financial stability

Last week, oil prices on world markets decreased in the context of the situation in Europe and investors’ concerns about feedstock demand. Experts believe that oil prices will continue to fall.

Yugeny Nadorshin, chief economist of AFC System

At the moment, oil costs a bit more than $107 per barrel Brent. It is rather expensive, the rebound was quick. For some time the growth will be observed, but it is caused by temporary factors. I don’t think oil prices will remain at the level of more than $100 per barrel this year. Tension around Iran and Syria contributes to current oil prices and the growth which we have seen during recent several weeks after the Euro zone summit. A big role was played by the terrorist attack and escalation of the conflict in Syria, which is probably close to an end. From my point of view it is the main factor that pushes oil prices. There is a second factor – expectation of quantitative easing in the USA and encouraging measures in China. These two factors seriously influence all feedstock prices, as well as other risk assets. Due to them in recent days ruble has improved, and they support oil price quotations. If players make a mistake in expectations of quantitative easing, we apparently will see a fast correction, and it might happen in August.

Natalia Orlova, chief economist of Alpha-Bank

By the end of the year and even in next 12 months I will stay optimist. I think, first of all, it is difficult to imagine that central banks will turn to any stiffening of monetary policies in the background of the macro-statistics which we see in developed countries. Probably a new round of financial weakening, monetary weakening will happen in some extent. At the same time, the situation in Middle East continues to worsen. This geopolitical factor creates hardening pressure on oil prices. My only concern is about dynamics of oil demand. At the moment we see negative data in the UK. In Germany there is certain expectation of growth. Apparently geopolitical and monetary factors will prevail from the point of view of oil prices definition and will lead to upward tendency.

Leonid Grigiryev, head of the World Economy Department of Higher School of Economics

2008 – an average price was $94. 2009 - $61. 2010 - $78. Then it grows: in 2011 - $110, and in 2012 we have $111. If the price remains, it will be similar to the last year price. But it is not the point. The point is how countries-exporters have forced their budget expenses up to this luxurious price. The Arab countries have the price lower limit at the level of $80-90. There are three reasons for that. First of all, it is a level due to which new projects are expensive. Secondly, budgets of the key Arab countries, especially Saudi Arabia, are balanced at the level of $90. That is why we are interested in a long-term price. Almost a half of our budget revenues are from oil rent. Thus, we ignore slight fluctuations during a year. It is connected with financial indexes, there serious interests in this sphere. The main thing about budget is that we shift from prediction of oil prices for the next year to an average price.

The audience didn’t realize scales of the revolution. I didn’t expect radicalism from President. An average price for these 5 years, including 2012, is $92. And our budget is balanced under $115 this year. I am looking forward the Ministry of Economy, the Ministry of Finances, and the government will fulfill the budgetary address under $92. Journalists will have hot summer and autumn – we will follow how they will manage to compose the budget and fulfill the norm. We will follow this practical conflict between urging and the common practice.

Valentin Pominov, chairman of the inter-segmental group of experts of Chamber of Commerce

In the last 8 years, since 2004, relation of the maximal price to the minimal price was 320%. This year surpassing of the maximal price over the minimal price is 25%. It is the smallest index for 8 years, i.e. variability decreased. It should be stated that the international society is a slave of world oil price fluctuations, and a normal person cannot understand it. The slavery was marked at the recent St.-Petersburg forum. Everybody said: “If the price is such, it will be like that. If it drops, it will be different.” Such an attitude to the world price, as if it is a god, is unacceptable in the early 21st century. Can the world price be predicted? Of course it can be predicted if it is done professionally. Efforts taken in Russia and abroad cannot be called systemic and professional. For example, it appears nobody follows in the centers of price formation, in New-York and London. What exactly person tries to understand what company influences prices today? Without knowing it we will always stay in the dark. We suggest launching a system of effective professional monitoring of price. We can launch this system in Russia, but it won’t be sufficient. The international society should do the same.

Alexei Belogoriyev, head of the expert-analytical department on FEC of the Energy Strategy Institute

From the point of view of the next year and volatility of the market, it is import in what terms and in what volumes the third round of quantitative easing will be launched by the US FEC. The volume of spare money depends on it. Secondly, the situation in euro zone: could default of Greece be postponed or controlled? It is significant to understand it for futures’ quotation because they are one of the key instruments of defense from dollar inflation. The drop of oil prices observed in May and June was caused by dollar falling and running from oil futures. The current tendency is supported by statements of Bernanke that promised quantitative easing and by the situation in Syria, even though the Iranian factor was played in winter and spring. Serious influence on prices is possible only in case of a full-scale military operation. Because now it doesn’t play the same role of 2011. As for Libya, in 2011 the key moment was in the threat that the developments could touch on Saudi Arabia, the main oil producing country. As the situation in Saudi Arabia is normal, revolutions of the Middle East do not play any significant role. As for Iran, only if a serious war is started. Thus, everything depends on the situation at the financial markets – how much money will be there and what situation with dollar will be.

Leonid Grigoryev, professor, head of the World Economy Department of Higher School of Economics

Russia doesn’t influence oil prices, and even gas prices. It influences current sales through investment policy in the long-term aspect. I can give you an example where we influenced seriously, but on drop of prices. Ahead of the crisis world energy demand grew with dramatic pace – by 3% a year. In fact nobody invested in it because oil prices were about $20 per barrel between 1986 and 2002. For 18 years nobody invested either in exploration or in processing. But the crisis and price boom would begin not in 2005, but in 2003 if Russia hadn’t introduced 2 million barrel in 2002 and 2003 additionally. Production decreased in Russia, and we added 2 million barrels in the early 2000s – UKOS and many other companies – extra 2 million barrels. Due to them we held up the price crisis, and lost a huge amount of money. We tried to benefit from low prices. We influence only in case of great volumes. We didn’t participate in reduction of exploration undertaken by OPEC – 3-4 million barrels in 2009. We didn’t influence the market indirectly, and it was understood in the West, bit OPEC claimed: “Why do everybody have good prices, but only we suffer losses?”

Tamara Kandelaki, head of Academician Leibenzon Oil and Gas Institute

Factors which probably influence oil prices can be divided into two parts. First are factors that have a long-term character, i.e. issues on life of future generations. First of all, it is presence of oil in natural riches. Who much oil do we have? It is the main factor because when it starts to exhaust, it will become more expensive. But we should remember that technological advance is unavoidable. At first there was wood, then coal as main energy sources. They say that in the future it will be gas. If we look at Shell strategy, the company is oriented at gas.

If anyone of you knows, there is such an index “years of reserves.” It is amount of oil reserves divided into production. Last year we had about 48 years. Thus, we have oil volumes for 48 years. Last year Iraq seriously reconsidered its reserves and the years of reserves increased up to 59 years. It is a great number. If we take this 10-year increase, it appears we could live for a decade due to reserves of the region where Iraq reconsidered reserves.

Secondly, as for short-term trends – today $107, tomorrow $108 – it doesn’t play any role in fact. Certain people make money on it. Today they make money, tomorrow they won’t make money. It is a game, and we don’t take part in. Of course a state could hedge its risks, just like oil companies do it, but in practice countries don’t do it. But a state can come to the exchange. The exchange is a game. Rebels come or don’t come – crazy traders think about the situation and how it can influence. It is not a global tendency. There are two global tendencies. One is inflation. If we take $100 today and 10 years ago, they would be different. We are the least company, the least country in this festival of life. We don’t participate as an instrument of influence. The US participate because they are the major consumer of energy in the world. This major consumer has its own interests. We don’t participate, we sell only. We sell, grab, take money, get taxes, and that is all. There are some means, including the exchange, but the state should outline its position and understanding that reserves are finite and we respect it, that would be our advantage.

The second aspect. In the future years we will see changes in the structure of the global energy balance. The USA implement reasonable arrangements which will lead to reconstruction of oil processing and usage of other energy resources of hydrocarbons, including Canadian oil. It means that Saudi Arabian resource will leave the USA in a great extent. How has Saudi Arabia prepared for it? They began to construct luxurious, I would say, modern petrochemical complexes. It is a very smart step. Outstanding pyrolysis are being constructed, they will produce modern high-quality goods. Therefore, they are preparing for leaving the market. You cannot provide certain volumes of feedstock at market and wait, nobody will buy it. Demand is balanced with offer at the oil market. Oil is a peculiar product, nobody needs extra volumes. It cannot be accumulated.

Natalia Orlova, chief economist of Alpha-Bank

In 2008 we experienced ambiguous changes. On the one hand, economics began to depend on oil prices seriously. Higher levels were needed for providing a budget balance. It is about equilibrium price. In 2008 the budget was balanced under $60, before it under $20-30 per barrel. Today the budget is balanced under $100. Secondly, the current account, i.e. the trade balance, is also balanced under $40-50, and now $80-90 per barrel are needed for balanced account. At the same time, dependency of Russia from capital outer markets decreased since the crisis. In 2008 we had 20% of bank assets financed by foreign debt, today it is only 13%.

Probably ruble will weaken in the context of growing dependency from oil. And it is reasonable to loan in rubles. That is why my only concern is that oil vulnerability is growing and is not compensated by the fact we become less dependent from international capital markets. We are focused on oil price fluctuations, that is why the Russian financial market correlates with oil prices. It is true that after the crisis dynamics of oil prices influences greatly dynamics of stock quotations.