Vyacheslav Kulagin: "Russia's decision to leaveOPEC+ deal was the first step in a multi-part game"

Against the backdrop of a price war between Riyadh and Moscow, Iraq and Kuwait, following the example of Saudi Arabia, decided to lower oil prices, reports Bloomberg. Now prices continue to fall, however, Deputy Minister of Energy of the Russian Federation Pavel Sorokin in an interview with Reuters predicted their growth in world markets to $ 40–45 in the second half of 2020. In an interview with Vestnik Kavkaza, the situation was assessed by Vyacheslav Kulagin, Director of the Center for Energy Research at the Institute for Pricing and Regulation of Natural Monopolies of the Higher School of Economics, Higher School of Economics.

- Do you consider the situation in the oil market unprecedented?

- The situation, indeed, is knocked out of the standard framework. There has not been such a one-day drop in oil prices in this century. The reasons are quite serious. There has never been such an oversupply of oil on the market. Today we have about one and a half million barrels of unrealized demand. That is, growth in oil demand was expected, but today, according to some estimates, there will be a drop - minus one and a half million barrels per day. OPEC + countries had a reserve of about 2-3 million barrels - such volumes of overproduction on the world market have never been. So the situation is really serious.

- That is, the main reason for what is happening is an overabundance of oil, and not the spread of coronavirus?

- There are two reasons. The first is an oversupply. OPEC + countries restrained him, while American manufacturers, on the contrary, moved forward, because they had no restrictions. The second reason is, of course, the coronavirus, which lowered demand. Automobile and air transportation stopped, airlines drastically reduced their travels on a number of routes, respectively, there is no demand for kerosene. This year, the transport sector sank quite seriously, and this, of course, affects global oil demand.

- Did Russia have leave the OPEC + deal?

- I think that this is an element of a multi-way game. How much this game is beneficial or not beneficial to Russia, it will be clear when we learn all the moves. So far, one move has been made that will have a negative effect on the Russian budget. But this is only the first step. Let's look at the following steps, then we can conclude.

- When can oil prices stabilize?

- If nothing happens, then we will go all year at low prices, and they may fall far below current levels as production increases by other manufacturers. The market may partially adjust next year, when volumes of shale oil will gradually begin to leave it. But it remains likely that oil producers will nevertheless sit down at the negotiating table in the coming months, and OPEC will take some decisions to coordinate the market.

In Russia, this situation may not be reflected as seriously as in Saudi Arabia, for which the current price of oil is too low, especially since they were going to continue conducting the IPO Saudi Aramco. For Saudi Arabia, this is clearly an unfavorable situation, and it needs to be changed. At the same time, I recall that when prices collapsed in 2014, it took more than two years to reach an agreement within the framework of negotiations. Arrangements were broken, but as soon as the deal took place, prices recovered to an acceptable level.

- How will low prices affect other oil producing countries, including our neighbors?

- Very significant in terms of the reaction of manufacturers were just 2014-2016. Then the countries, whose national currency exchange rate was not rigidly tied to the dollar, devalued the currency a little and felt quite well. At that time, some oil companies had even better indicators than at high oil prices. In Russia, for example, the price of oil fell, but at the same time, the main expenses went in rubles, and the ruble also weakened quite a lot. As a result, there was a gain in rubles, and oil companies, one might say, did not feel a price collapse, except that the cost price, expressed in dollars, halved. In general, those countries that have a flexible economy, such periods pass quite easily, but those countries, in particular the Middle East, which were tightly tied to the dollar, had a negative budget and had to sell off assets.

In 2014, many said that Russia's policy was unique: both the economy and the ruble weakened, but from the point of view of economic stability, we went through that period quite well. Having weakened the ruble exchange rate, Russia increased the competitiveness of its products in foreign markets, and not only oil, since it, in fact, has become half the price. A number of export industries made a profit. Of course, those companies that worked on imports in Russia lost. As a result, for example, car manufacturers that produced goods inside Russia normally went through that period, and those who imported cars temporarily refused to work on the Russian market, because they simply could not compete. In a word, the whole question is readiness for such a situation.

- How difficult is the situation now for Saudi Arabia, which has refused Russia's offer to extend the deal with OPEC for the second quarter?

- In Saudi Arabia, the budget includes an oil price of about $ 75 per barrel, which is a fairly high level. In recent years, we have reached these marks, but on average the level was lower. Now a sharp drop in prices will lead Riyadh to a strong budget imbalance. With good price dynamics, Saudi Arabia tried to sell Saudi Aramco profitably, but today's price dynamics does not at all help to implement this sale action. Now this asset can only be sold for nothing, which, of course, will not be done in Saudi Arabia. But in the end, again, they have nothing to fill the budget. Yes, Saudi Arabia can increase production under current conditions, but an increase of one to two million barrels per day does not compensate for the fall in prices. The economy of Saudi Arabia is too dependent on oil prices, and they do not have many options where to turn.

- And what about the Russian economy?

- The Russian economy is highly dependent on oil, but it is flexible in terms of the exchange rate. Oil prices dipped by 10% and the ruble weakened by 10%, which means that nothing has changed for the Russian budget. The budget is formed in rubles, all budget obligations in the domestic market are in rubles. If we talk about the supply of petroleum products to the domestic market, then at high prices the state is forced to help domestic markets so that prices are lower due to damping mechanisms of the reverse excise tax. At low prices, you don’t have to spend money on this; accordingly, the protective mechanism is already working the other way, when at high incomes the state shares with people, and at low incomes, accordingly, it doesn’t - this is already a defense of the state budget.

When we are below the cut-off price of $ 40 per barrel according to the budget rule, we have to look for options for balancing the budget. These issues will have to be addressed, and I hope that the decisions will be implemented not only at the expense of the ruble. The ruble exchange rate has already partially softened the situation: it fell by 20%, that is, the cost of our oil production fell by 20% in dollar terms, which means that foreign exchange earnings from oil automatically increased by 20% in ruble terms.

- That is, Russia withdrew from the OPEC + deal, being ready for the consequences?

- I want to believe that Russia was ready for the consequences and calculated everything. Otherwise, such a decision would not be accepted. But I still think that this is an element of the game, one of the steps, and others will follow. The only question is which and when.