Oil at $100: experts assessed the consequences for Russia

In mid-2023, oil quotes were at a crossroads: the current price of hydrocarbons at $80 per barrel of Brent does not seem to be a reliable guide for many experts. The future of the commodity market in the forecasts of the world’s leading analytical centers looks extremely vague: on the one hand, there are prerequisites for a collapse in quotations to $40-60; on the other hand, there are factors that allow prices to rise above $100 per barrel.

According to the results of the first half of 2023, oil prices can boast enviable stability: Brent quotes remain in the range of $75-85 per barrel. Meanwhile, this stability is given to the market at the cost of great effort. In many ways, the cost of “black gold” is supported by the largest producers of raw materials – Russia, Saudi Arabia and other members of the OPEC + mining alliance, which, by restricting exports, balance the demand and supply of energy resources in the market.

The second half of the year promises unexpected surprises for the oil market. Moreover, the upcoming “pig in a poke” can turn out to be both “affectionate and fluffy”, and demonstrate a wayward character. It is possible that the cost of oil, despite the maneuvers of the producing countries, will collapse one and a half to two times – to $40-60 per barrel. This can be facilitated by a sharp drop in demand for raw materials on the world market, which will occur as a result of an economic recession in the developed Western powers that import significant volumes of oil. But the opposite scenario is also possible – an increase in oil prices to $100 per barrel. This will happen if production in African states – Libya and Nigeria, due to the volatile internal political situation, is sharply reduced, and Asian countries, primarily China and India, require additional volumes of hydrocarbons. At the same time, Washington is also going to increase imports to replenish its strategic reserves.

So where will the barrel swing in the short term and why? MK addressed this question to experts in the financial and energy markets.

Natalia MILCHAKOVA, Leading Analyst at Freedom Finance Global:

“This year, the demand for energy resources clearly exceeds the supply, and the threat of a recession in Western countries has practically receded. Therefore, a fall in the cost of a barrel of Brent to $40 is not expected. At the same time, the increase in the price of a “barrel” to $100 also raises serious doubts, since the growth rates of most locomotives of the world economy, including China and India, are still very slow.

For Brent to fall to $40 a barrel, it would take a major global crisis to break out, as happened during the coronavirus pandemic, or a recession in developing countries, at least in China. In turn, for the growth of oil prices above $100, a serious deficit of hydrocarbons is required. Now even the voluntary reduction in oil exports by the largest producers – Saudi Arabia and Russia – is compensated by countries that are not members of OPEC+. Moreover, not only the United States and Canada, but also Iran and Venezuela, which continue to export oil through the “shadow” tanker fleet. The prerequisites for raising prices to $90-95 are quite tangible, but they are still not enough for a barrel to rise to $100.”

Artem TUZOV, Director of the Corporate Finance Department at IVA Partners Investment Company:

“Since the creation of the OPEC+ format in 2020, oil prices have become more predictable. The alliance of producers of “black gold” has sufficient resources to control prices for raw materials to take into account the interests of the entire association. The requests of all oil-producing countries are, in fact, the same: to earn as much and as long as possible from the sale of oil. This goal can be achieved by curbing competition outside OPEC + by increasing production and supply if the cost of hydrocarbons significantly exceeds the profitability of shale oil production. That is, above $90-100 per barrel of Brent. If oil quotes are below the price threshold that OPEC+ members are trying to avoid, then the alliance is going to reduce production and supplies to the world market. Such operations are carried out at the cost of hydrocarbons at about $60-70 per “barrel” of the North Sea variety.

As a result, both forecasts for oil growth above $100 and for a fall to $40 will not come true with a high degree of probability. The market regulator represented by OPEC+ will take measures to mitigate the influence of external circumstances on the market price and reduce volatility, while leaving no opportunity for competitors to increase production. Last year was one of the highest in terms of inflation in developed countries. Therefore, $100 per barrel today and $100 per barrel two or three years ago cannot be compared. Oil, taking into account inflation, in any case, still tends to reduce its value in real terms.”

Fedor SIDOROV, private investor, financial analyst:

“The oil market is now characterized by growing tensions and the “forecast war” between OPEC and the International Energy Agency (an autonomous agency within the OECD that promotes the global balance of supply and demand of energy resources – “MK”) does not add certainty. It is necessary to take into account the effect of the decision of OPEC + and Saudi Arabia to reduce production. While prices are steadily rising. However, demand will soon exceed supply: the difference could be up to 2 million barrels per day. OPEC+ members do not yet see the problem of a shortage of raw materials, so it can be reasonably assumed that a tight balance will be established in the market in the second half of the year.

In turn, judging by the statistics of the US Department of Energy, this year the world oil production will outpace consumption by 360 thousand barrels per day. The first two quarters of 2023 were in surplus, and a daily deficit of 200 thousand barrels is expected in the third quarter.

And it is worth preparing for the fact that 2024 will be completely scarce. At first, the lack of raw materials will be small – 20 thousand “barrels” daily. In the future, the global economy is likely to overcome the negative and move on to growth. Then oil quotes will rush to $100. True, in the coming months such a sharp jump in prices should not be expected – Brent will be valued at $85, and Urals will fluctuate around $63-65 per barrel.

Mark GOIKHMAN, analyst at Capital Skills Financial Academy:

“An increase in oil demand in the second half of the year is suggested by the IEA and OPEC forecasts released in mid-July. In accordance with them, energy consumption in China, which is reviving after the removal of pandemic restrictions, will noticeably increase. In addition, inflation in America is slowing down: now it is 3% and close to the target level of 2%. This gives hope for an early end to the multi-month increase in the interest rate of the US Federal Reserve and for the subsequent reduction of this indicator. Such possible changes will stimulate economic growth due to cheaper loans, which will increase the need for energy resources. A noticeable weakening of the dollar in the world is acting in the same direction. Since oil prices are measured in dollars, the depreciation of the greenback will spur commodity quotes to growth. Therefore, investors assume some shortage of supply until the end of the year. The market focuses on the future, which is already reflected in prices. Since the end of June, in less than a month, “black gold” quotes have risen by 11% at once: from $72 to $80-82 per barrel of Brent.

However, isn’t such a violent price spurt a kind of “false start”? The emotional market easily responds to positive news. Meanwhile, there are also many “cooling” factors. The other day, China published discouraging economic data: in the II quarter, China’s GDP growth slowed down from 2.2% to 0.8%. The volume of retail sales in the Asian state in June grew by only 3.1%, which is several times less than in May (12.7%) and April (18.4%). Also in China, the growth of investment in fixed assets declined. It seems that Beijing is not accelerating, but decelerating…

Unfavorable market conditions will prevent the quotes from taking off. To raise the price of a barrel to $100, according to Goldman Sachs, a shock drop in the supply of raw materials by 2 million barrels per day is required. However, for Russia, given the significant depreciation of the national currency to 90 rubles per dollar, the current oil prices of $75-85 are quite comfortable. Such a corridor allows you to get a greater return on the export of goods, including the energy sector.”