Oil is getting cheaper every day: how does this threaten the Russian economy

Why the world needs less and less “black gold”

Oil prices have fallen back to where they started 2022. For the first time since January, stock quotes of “black gold” have fallen below $85 per barrel, and if we count from mid-June. then the “barrel” fell in price by a third. But it is quite possible that this is not the end of the fall: the global decline in demand for energy resources is at risk of continuing, which will “drop” the current quotations of raw materials even more.

The decline in the cost of “black gold” has been observed for four months in a row: having reached a maximum of $125 per barrel in June, the quotes managed to drop by 30%. Two fundamental factors had a negative impact on the price of a barrel. Firstly, there is periodically emerging news about the resumption of negotiations between Iran and the United States on the settlement of the nuances of the “nuclear deal” and the lifting of “oil sanctions” against Tehran, which prohibit the Islamic Republic from exporting hydrocarbons. Secondly, a decrease in demand for energy resources from China, whose economy cannot yet recover from the coronavirus pandemic. As Alexander Frolov, deputy head of the National Energy Institute, notes, since the Celestial Empire reduced fuel consumption due to anti-COVID measures, there was a local oversupply that was limited in time, which had an additional negative impact on the stock market.

Well, the last blow to stock quotes was delivered by the US Federal Reserve System, which significantly increased the interest rate on federal loans at its last meeting. Back in the pandemic years, banks themselves offered to pay extra to the client who issued the loan, but now the tightening of monetary policy gives Washington the opportunity to strengthen the national currency, the exchange rate of which has exceeded the value of the euro. Well, the strengthening of the dollar automatically reduces oil quotes on world markets.

At the same time, Washington continues to play its game with Europe to replace Russian hydrocarbons with its own export raw materials. According to the head of oil trader Vitol Russell Hardy, every day the countries of the Old World will be able to buy more than 1 million barrels of “black gold” from American producers. According to the US Energy Information Administration, in August, for the first time since the end of 2015, when the forty-year ban on its export abroad was lifted, daily oil exports exceeded 4 million barrels per day.

However, according to experts, American producers have practically no chance to replace Russian oil with their own raw materials. To increase supplies to its European allies, Washington had to “open” the national Strategic Oil Reserve, whose reserves, according to The Wall Street Journal, have reached their lowest level for the first time since 1984.

Against the backdrop of falling fuel prices, OPEC+ countries may consider continuing to cut oil production. At the previous meeting, held in early September, the members of this alliance, including Russia, despite the persuasion of the United States, which insisted on opening the production cranes at full capacity, on the contrary, reduced oil production in October by 100,000 barrels per day. The next summit of the “oil generals” is scheduled for October 5 – and apparently, this meeting will become one of the main events that determine the cost of a barrel for next year.

According to TeleTrade analyst Alexei Fedorov, it is almost impossible to prevent a further decline in oil prices. “The global economy has entered a recession, characterized by a fall in aggregate demand for both consumer goods and commodities. Oil is no exception. Thanks to the actions of OPEC +, as well as the tension in the energy market that arose after the introduction of anti-Russian sanctions, oil prices were kept above $100 per barrel throughout the summer. However, the global economy is slowing down, demand is falling more and more and dragging commodity quotes along with it. This process cannot be stopped until the world economy finds a new balance of supply and demand at a lower level,” the expert believes. In his opinion, the possibility of containment of oil prices by OPEC + during the macroeconomic downturn is extremely limited.

Meanwhile, the situation may be affected by the introduction of new sanctions against Russia, including the installation of a “ceiling” for prices for domestic hydrocarbons, as well as retaliatory measures from the Russian side, which provide for a complete halt in the supply of raw materials to the countries supporting the sanctions. So far, as BitRiver financial analyst Vladislav Antonov recalls, due to sanctions, Russian oil is sold (mainly to Asia) at a discount – discounts are approximately 20-30% per barrel. The decrease in the cost of hydrocarbons reduces the income of our country. According to the Ministry of Finance, in August, Russia’s oil and gas revenues did not reach 672 billion rubles, although in July they successfully exceeded the mark of 770 billion rubles.

“The price of Russian oil will not fall as fast as the global cost of hydrocarbons, since our raw materials are already sold at a discount. So far, there is no surplus of energy resources on the market,” said Kirill Melnikov, head of the Energy Development Center. “Meanwhile, it is important to emphasize that the decline in oil prices, which may continue, will lead to a weakening of the ruble due to a reduction in the positive balance of foreign trade.”