Russia expects oil at $40 by the year-end
Crude’s 10% decline in March alone amid supply woes is making the market nervous
Perhaps the Bank of Russia knows something the world doesn’t. As the Organisation of Petroleum Exporting Countries and its allies prepare to meet for a review of their production cuts, the central bank of the world’s biggest energy exporter is hunkering down for years of oil near $40 a barrel.
While analysts see the price of benchmark Brent crude — which trades at a small premium to Russia’s Urals export blend — rising 16 per cent from current levels by the end of the year, oil’s 10 per cent decline in March alone amid supply woes is making the market nervous. Russia, a key partner in the deal and a participant in the talks in Kuwait, might only add to those jitters.
“The Finance Ministry, the cabinet and the central bank are leaning on the cautious side in terms of their expectations regarding growth, driven still to a large degree by oil,” said Piotr Matys, an emerging-market currency strategist at Rabobank in London. “It’s better to be conservative and to be surprised on the upside than too optimistic and end up disappointed.”
Policymakers in Moscow said on Friday they see Urals at an average of $50 a barrel this year, but falling to $40 at end-2017 and then staying near that level in 2018-2019. Russia’s Finance Ministry similarly highlighted the $40 level in January when it announced that the central bank will start buying foreign currency on its behalf when crude exceeds that level in order to insulate the exchange rate from oil volatility. The price of $40 is additionally being used to calculate the country’s budget in 2017-2019.
Forecasting oil is no game for the Bank of Russia. Its 65 per cent plunge in 2014 and 2015 battered the nation’s currency, forced an emergency rate increase in the middle of the night and pushed Russia into recession. The share of oil and gas revenue was at 36 per cent of budget income in 2016.
Oil will tumble to $40 if Opec doesn’t extend its agreement later this year, one of the most prominent producers in the US shale patch said this month.