November oil paradox: commodity prices are falling, but the ruble is rising

Expert Chernov explained the impact of the energy market on the foreign exchange

After the escalation of the military conflict in the Middle East, oil prices, despite the expectations of market participants, did not rise sharply, but fell by about 10% to $82 per barrel. The exchange rate of the Russian currency, until recently tied to the cost of “black gold,” on the contrary, strengthened from 100 to 92 rubles per dollar. As Freedom Finance Global analyst Vladimir Chernov explains, this contradiction should not be surprising: “wooden” has not been correlated with the price of “black gold” for more than a year, but is based on new, more flexible and beneficial instruments for our country.

– For what reasons are oil prices falling? Many believed that the conflict in the Gaza Strip and the expectation of a big war should accelerate prices?

– After the outbreak of the conflict in the Middle East, the price of Brent rose by 10.5% – everyone was really afraid of interruptions in oil supplies from the region. As such concerns subsided, the risk premium began to fall, and quotes dropped even lower than they were before the outbreak of hostilities: the supply of raw materials on the market increased again, and the volume of demand was in doubt.

The price situation was spurred by the October easing of Washington’s sanctions against Venezuela: an oil agreement between Caracas and the French company M&P was recently announced, similar to the Venezuelan deal with the American Chevron. It is capable of increasing the volume of hydrocarbon supplies to the world market. Russia also did not stand aside, increasing its exports of raw materials to the maximum over the last 4 months (almost 3.5 million barrels per day). The growth of American oil reserves and the increase in the forecast for daily production in the United States next year to 13.15 million barrels also contributed.

– What’s wrong with the demand for “black gold”?

– The risks of a decrease in the demand for energy resources are associated with a slowdown in the growth rate of the global economy against the backdrop of rate increases by world central banks to combat inflation. Representatives of the US Federal Reserve System do not rule out further tightening of its monetary policy. At the beginning of the year, a rapid recovery of the Chinese economy after the coronavirus pandemic was predicted, which should have led to a surge in demand for “black gold.” However, the economic recovery of the Middle Kingdom is proceeding at a slow pace – in October, the country’s trade balance fell by 27%, and the index of business activity in the manufacturing sector fell below 50 points, which indicates a reduction in demand for hydrocarbons in the leading Asian power.

– What barrel prices can we expect in the near future? What will be the reason for the increase or decrease in quotes?

– In the near future, the price of Brent will consolidate around $80 per barrel. For further movement of quotes, trading participants will continue to assess the prospects for global economic growth and the risks of interruptions in export supplies from the Middle East. The danger of prices falling below $80 is quite high, but a ministerial meeting of OPEC+ countries will take place at the end of November, where a decision will be made on a possible extension of production restrictions for next year. If oil prices fall below this psychological mark, the alliance members will try to carry out verbal interventions, and possibly production measures.

– What oil prices are beneficial for Russia?

– Any oil exporter benefits from the highest possible prices. The cost of production in Russia varies, depending on the deposit, the complexity and depth of the extracted reserves, logistics, and so on. Representatives of OPEC+ said that absolutely everyone was satisfied with the Brent price of $90 per barrel, but they began to reduce production and export volumes when quotes fell below $80 per barrel. This indicates that this level is also quite satisfactory for everyone, including Russia.

– Riyadh and Moscow promise to continue limiting production. But due to export limits, world prices threaten to rise to $100. Then consumers will begin to reduce purchases. Will the upcoming OPEC meeting save commodity prices?

– As I already said, at the next meeting the alliance members will discuss the implementation of the deal to reduce supplies in December and the extension of the agreement to 2024. If it is extended, the organization will again influence the quotes, which means maintaining their value at acceptable values. If OPEC+ participants decide to complete the deal, then a driver will arise for prices to fall to $75 for Brent as early as December 2023.

– Oil prices have decreased, and the ruble exchange rate has increased. In past years, it was believed that commodity quotations and the national currency exchange rate were correlated with each other: when hydrocarbons became more expensive, the ruble also increased in price. When and, most importantly, why did the ruble become untied from oil?

– The ruble exchange rate stopped following oil quotations in the first quarter of 2022 amid the aggravation of other factors influencing the pricing of domestic banknotes. Due to the aggravation of the geopolitical situation and external pressure from Western sanctions, the ruble began to fall sharply in price, despite the then rise in world oil prices. Then our government took a number of measures to strengthen the value of the national currency. Its exchange rate began to be influenced by completely different factors that dramatically changed the balance of exchange demand and supply for rubles: the mandatory sale of foreign currency earnings by exporters, various other currency restrictions, the transition to settlements in rubles with importers…

– Is it possible in the future to restore the connection between the ruble and oil, and under what conditions?

– We will no longer see such a close correlation between the value of the ruble and oil as before, since Russian budget revenues are no longer so dependent on oil prices. If in previous years the revenues of the Russian treasury consisted of 51% of raw material revenues, now, against the backdrop of external pressure on hydrocarbon exports, our country has noticeably increased revenues from other budget items, due to which the raw materials component of the federal treasury has dropped to 34%.