There are many players that may influence the trend in crude oil prices. From the financial markets - suffering from a grueling volatility, to the production strategies of the United States and Russia, through the decisions expected of OPEC. When will the long wait be over?

In January, oil prices fell. In particular, the ICE Brent opened at $38.59/b and closed at $35.89/b, while NYMEX WTI opened at $38.06/b and closed at $33.75/b. On January 20, both oil quality prices reached their minimum since December 2003, respectively $28.55/b and $28.26/b. During the last 10 days of the month, prices recovered due to the rumors dealing with a possible agreement between OPEC and the Russian Federation aiming at a common cut in oil supplies.

Throughout the first month of 2016, the €/$ exchange rate steadily traded at around 1.08 dollars per euro. On January 21, as a direct consequence of the fall in oil prices, the ruble reached its new lowest since December 2015, against both the dollar (1$/84.2 rubles) and the euro (1€/91.7 rubles).

According to Sergio Squinzi, the President of the Italian Manufacturers’ Association, the current €/ruble trend is an obstacle for exports and the Italian government should lift the sanctions that are still in place against the Russian Federation. Related: OPEC Has Never Had As Much Power As People Think



Latest data and estimates on oil and gas

Currently in the oil market, there is an oversupply of 1.0-1.5 million b/d. Iran, now relieved of the sanctions, could offer 300 thousand b/d of additional crude by the end of the first quarter of 2016. However, in December 2015 for the first time since September 2012, the non-OPEC production has slightly decreased in comparison with the year’s earlier levels, while the OPEC output of 32.28 million b/d remained up to the Cartel’s production ceiling.

According to the data provided by the International Energy Agency on January 16, the outlook for 2016 has demand growth moderating to 1.2 million b/d thus supply is expected to exceed demand by 1.0 million b/d.

At present, U.S. crude production is estimated at around 9.2 million b/d but the unconventional oil and gas output have been decreasing in conformity with the EIA Drilling Productivity Report. Adam Sieminsky, administrator of the U.S. Energy Information Administration, stated on January 19, that the 2016 U.S. crude production is forecast to decrease by 700 thousand b/d (7 percent), to 8.7 million b/d. That comes after the 8 percent increase in 2015 over 2014, which was the highest rate since 1972. Related: Shale Set To Decline Substantially This Year



Political and economic assessments

Despite the fact that Saudi Arabia and its allies in OPEC (Kuwait, Qatar and United Arab Emirates) are clearly acting directly against the interests of half of the Cartel and their national budgets have been suffering big losses, the very risky Saudi-led strategy of maintaining low prices thanks to their lower costs of production is finally bearing some fruit. Indeed, the non-OPEC output has started decreasing. The Iranian Oil Minister, Mehdi Asali, expressed concerns about this situation stating, “for the oil market this is [the oversupply] the highest threat in the short term‘.

In spite of the fact that in 2015 the American frackers reduced their extraction costs by 40 percent and the well productivity increased by 48 percent, the U.S. unconventional output seems to be only at the beginning of its nightmare too. Wolfe Research forecasts that approximately one-third of U.S. enterprises that pump crude might need to file Chapter 11 bankruptcy before mid-2017 if oil prices do not recover to $50/b.

Other estimates are even worse: Fadel Gheit, senior oil and gas analyst at Oppenheimer & Co., stated on CNBC “that half of the current producers have no legitimate right to be in a business where the price forecast, even in a recovery, is going to be between, $50/60/b and they need $70/b oil to survive‘.

Taking into account that American oil and gas producers, according to Bloomberg, are expected to announce losses totaling over $15 billion in 2015, the hope is that Nouriel Roubini will be proven wrong when he states that the new world financial crisis could be detonated by the bust in the U.S. shale industry. Related: Is This The Best Moment To Get Into Oil?



Moscow’s turning point

The decision by the U.S. Federal Reserve to raise rates in December 2015 for the first time since the beginning of the financial crisis, coming on the heels of the end of an era of quantitative easing, seems to have marked the start of the strong dollar era. The dark clouds looming over the global economy could force the Fed to backtrack on its promise to raise interest rates again during the next months. Nevertheless, these factors have directly affected the fall in oil prices, which in turn, poses new challenges for the Russian economy in 2016.

In the short term, the macroeconomic trend of the Russian Federation is still stable thanks to the $368 billion reserves of the Central Bank and the two national Funds, whose liquidity respectively, total $70 and $80 billion. Furthermore, after the revision of public spending (except the military expenditure), the deficit/GDP ratio is under three percent. Finally, the fall in oil prices is partially counterbalanced by the depreciation of the rubble – that means a reduction in majors’ costs – and the simultaneous appreciation of the dollar, which allows higher revenues for the producers and the Russian State too.

On the other hand, the real risk is that the depreciation of the national currency will lead to a higher inflation, eroding the purchase power of consumers, while also preventing the Russian government from achieving the 2016 inflation target of 6.4 percent, after posting a 12 percent inflation rate in 2015.

In the medium term, aside from the uncertain financial stability of the projects that are still in place, the Russian Federation must face the issues clearly pointed out by Gherman Gref. The President of the most important Russian public bank declared that Russia “has failed to adapt to economic and technological changes and has fallen into the ranks of “downshifter” countries, where the most terrible export, and the largest export, which must be stopped, is the export of brainpower”. Actually, because of a fall in oil prices from $50/b to $30/b, the Russian Federation, which extracts 10 million b/d, loses $200 million/d or $70 billion a year. This is an amount equal to one of the national Funds.

The Kremlin should not overestimate the statement made by Sergio Romano, former Italian representative to NATO and Ambassador of Italy in the Soviet Union during the ’80, who believes that Vladimir Putin is right when he declares that the North Atlantic Treaty Organization doesn’t make sense anymore. Despite the widely-cited production freeze that Russia is negotiating with OPEC, the Russian government probably is not placing a lot of hope on in the possibility that OPEC will soon call an extraordinary meeting and cut production.The Russian Federation should probably work to accelerate the development of its oil benchmark - the Urals - which will be traded in rubles. Moreover, the Russian Federation is able to mitigate the negative effects of low prices and sanctions by increasing oil exports to China. In conformity with the data from RBC Capital Markets, the Saudi share of Chinese crude imports was about 20 percent at the beginning of the decade, while Russia’s was below 7 percent. According to Austria’s Junge Welt, Saudi oil supply to China decreased from 55 million to 50 million tons in 2014, while the supply of Russian crude surged by 36 percent, to reach 42 million tons.

However, this data is only a small view of the developing partnership in trade, energy, diplomatic and military cooperation between the two United Nation Council member States.

By Demostenes Floros via ABO.net

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