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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Collapse Looming for Crude Oil Market in 2014?

Commodities / Crude Oil Dec 18, 2013 - 10:22 AM GMT

By: Pravda

Commodities

Foreign experts provide devastating forecasts for the oil market and believe that the conflicts in the Middle East would affect the value of "black gold." According to the experts, price per barrel will fall at least five times. One of the major players, the Russian Federation, will then be in a disadvantaged position. However, Russian experts were quite amused by these forecasts.


Foreign experts and analysts have long been threatening Russia and other world powers with falling oil prices. Despite the fact that so far the conflict in Syria supports the world market price of oil at a high enough level, next year, amid disagreements between Saudi Arabia and Iran, the situation could worsen dramatically.

The most daring assumption was a price drop to the level of 1990, i.e. up to $20 dollars per barrel, which can supposedly serve Iran's intention to dump the oil market. Foreign industry experts based their conclusion on the information that came from the Organization of Petroleum Exporting Countries (OPEC) that they would not increase the rate of oil extraction in 2014. However, the government of Iran, which is a member of OPEC, said that they would not agree to moderate their appetites in the extraction of raw materials and were generally ready to sell oil at a price of $20 dollars per barrel. This statement has raised the fears of the experts and caused their bold conclusions about the sharp drop in the oil market.

Pravda.Ru asked the experts whether the forecasts of foreign analysts should be taken seriously, or whether this was another attempt to undermine the relative stability of the Russian economy. According to the director of the Energy Development Fund Sergey Pikin, the drop in oil prices to $20 per barrel is "utter nonsense."

"Such prices are impossible not because the situation is stable or unstable, but due to the fact that the cost of production, in contrast to the late 1990s, has actually increased. Even if we take the cost of production in the largest countries, for example, Saudi Arabia and the Asian region where oil is extracted, it has since grown too. In the budgets of all oil producing countries the price of oil is roughly around $100.

Everyone bases their prices on this number. Therefore, if there is a really serious movement down for some reason, the coalition of these countries in the form of OPEC or even those who have not joined OPEC, have levers of influence on the price situation. This is the first and the most important factor, the expert explained, therefore, all such statements are simply ridiculous. Russia is a major oil producer and exporter. In principle, Russia is ready to act together with OPEC in the event of any emergencies. The situation in the late 1990s showed that such coordinated action is possible. "

The forecasts for such a drastic fall in prices in the oil market were not supported by the first vice-president of the Russian Fuel Union, President of NP "Petroleum Club of St. Petersburg" Oleg Ashikhmin.

"I am far from thinking that the prices will fall to that level. If there is a fall, it will likely reach $80 per barrel. However, our analysts calculated the situation and the state budget and all other areas based on this assumption. I hope that Russia controls the current political situation, and with this in mind, the fall in prices on the world market to such a low limit now seems unrealistic," said Ashikhmin.

Interestingly, many Russians are waiting for the oil prices to decline. These expectations were explained by First Deputy Prime Minister Igor Shuvalov at the World Economic Forum in Moscow in October of this year. According to the official, there will be demand for innovation when there is no hope for higher oil prices for Russia's traditional exports. So far, this most traditional export, oil, seriously inhibits the innovative development of Russia. Thus Igor Shuvalov expressed the opinion of many Russians who are convinced that oil is the root of all evil, but people in power are rather partial to this resource.

"Some would argue with Igor Shuvalov, but these words in the context of the structure of the Russian economy do not seem silly and their author looks like a sane person," noticed blogger teh_nomad.

"Saudi Arabia is not bothered by high oil prices. But if Shuvalov and other managers come there, even camels and sand will quickly run out there," ironically noted user mss mss.

"Does this mean that a drop in oil prices should lead to the emergence of new faces in the leadership of our economic and industrial block? Will the existing leadership yield them space, for there will be nothing to steal? It looks like a universal joke or stupidity. "We can't develop now because we have lots of money in our budget but, when we don't have it, we will develop," wrote user corokoc.

The expectations of some Russians and foreign experts are similar, but their goals are different. "People heard something vague about the so-called "Dutch disease," but do not really understand what it is. Investment in Russia is unpopular not because it is more profitable to invest in the oil industry (which is done mostly by state-owned companies on the orders of the Kremlin), but for a variety of reasons, such as tax (the opportunity to work in the offshore) and climatic and geographical reasons (all else being equal, production in Russia is more expensive than in most countries, and transport costs are higher). There are lots of places where money can be invested with much higher returns," said Vladimir Isaev, an expert of "Finam." "If we rule out a scenario with closing market in the country and planned economy, it is precisely the high oil prices that provide an opportunity to develop the Russian industry and agriculture, as they provide domestic demand, both from the public and from the government. With low world prices for hydrocarbons we also lose the advantage of relatively low (compared to Europe) energy prices."

The expert found Shuvalov's judgment and the prediction of a sharp drop in oil prices to a level of $20 per barrel unreasonable. At the same time, Vladimir Isaev suggested how events will unfold if suddenly the most desperate forecasts of foreign colleagues come true.

"Russia is likely to continue oil production in volumes close to the current ones. Our country is not a member of OPEC and is not obliged to comply with the restrictions of quotas imposed by this organization. The drop in oil prices may have to be compensated with a slight increase in exports and decline in domestic sales. Perhaps, a number of projects for the development of new deposits, primarily on the shelf and in the Far North that have not yet reached the stage of production will be frozen until better times. However, we must not forget about the long-term contracts with China where the volume and prices are fixed," reminded the analyst.

Indeed, most experts are inclined to think that as long as there is a high demand from large emerging economies such as China, followed by India and Pakistan, as well as the intention of the U.S. to abandon the import, the decline in oil prices should not be expected, regardless of the decisions made by OPEC members.

Maria Snytkova

Pravda.ru

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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