15.12.08

Russian crude oil has dropped to 35 U.S. dollars per barrel, which is way below the most apprehensive forecasts of oil producers, and has come close to the Russian government's pessimistic scenario for next year.

The budget that was hinged on 95 U.S. dollars per barrel is squalling and the foreign exchange/gold reserves are melting down. This prompts the Russian experts to augur an inevitable devaluation of the ruble, which they say, however, will in all probability be losing value gradually, not abruptly.

If the averaged annual price of crude gets to around 30 dollars per barrel, the federal budget will have a shortfall of 3.5 trillion rubles /USD 1=RUB 28.0 at the current exchange rate/ and this is comparable to the size of the Reserve Fund /3.7 trillion rubles as of December 1/.

This means the Reserve Fund that has been accumulated thanks to super revenues from oil exports will go off almost fully to finance budgetary spending, the Moscow-based Vedomosti daily says.

Russia's Urals brand for Rotterdam delivery went down 14.5% to 35.6 dollars per barrel December 5. The fall for Augusta port delivery was even bigger -- 16.2% to 34.9 dollars. The previous time the Urals brand traded below 35 dollars per barrel was in July 2004.

Compare this to the forecasts that underlie the planning of 2009 budgets by major Russian hydrocarbon producers. OAO Rosneft forecasted 50 dollars per barrel, while LUKoil and Gazprom quoted 45 dollars as a pessimistic level.

Russian oil producers began to register declining revenues in the 3rd quarter of the year. Rosneft posted an 18.6% reduction of net profits to 3.5 billion U.S. dollars. The Central Control Board for the Fuel and Energy Sector said exports outside the CIS went down almost 16% in November versus the same month of 2007.

Oil prices are plummeting so fast that even the government's decision to reduce the term for computation of the oil export duty to one month will not save the situation, as the duty for January 2009 will be computed proceeding from the price of 45 dollars per barrel.

This duty provides for up to 20% of budget revenues and its shrinking by a third will slim the revenues in January by 7% to 10%. Experts working for the Vremya Novostei daily believe that a cheapening of the barrel of crude by just one dollar slashes the annual budget revenue by 2.2 billion dollars.

Vedomosti quotes Adam Siminski, an analyst at Deutsche Bank as saying crude may even drop below 30 dollars if China slides into a recession.

On this background, Dr Leonid Grigoryev, the director of the Institute for Energy & Finance Studies told Vedomosti 40 dollars per barrel is an unacceptable price as the upper limit of costs stands at 60 dollars.

"This can be explained for by overlapping factors," he said. "On the one hand, there's a seasonal decrease of costs and on the other, the crisis is developing faster than expected. The output and demand are falling and this affects the price of oil."

Dr Grigoryev indicated that 60 dollars per barrel could be an admissible price in the current situation.

He mentioned OPEC's plans to slash the daily output of crude and its appeal to Russia to do the same, saying however that the latter is hardly in the cards.

"Oil production here is falling of its own for natural reasons and we don't have to take any special decisions to reduce it further," Dr Grigoryev said.

The falling prices have cut down Russia's export revenues and necessitated a devaluation of the ruble, which the Central Bank is carrying out step by step as it lowers the cost of the binary currency basket consisting of the dollar /0.55/ and the euro /0.45/.

Friday, the bank again revised the basket's maximum value upwards by 30 kopecks, which means that the ruble has lost almost 4% against what the basket cost as of November 22.

Some analysts claim that a sharp fall of export revenues and, as a consequence, of the national balance of payments on the background of the overpriced ruble poses a risk of repetition of the events of 1998 when the government used up all the reserves for supporting the ruble and then had to devalue it abruptly all the same.

Economists also claim that the ruble's exchange rates must fall 10% to 15% even if the oil price were to beat about 50 dollars per barrel.

Gazeta newspaper quotes Yevgeny Gavrilenkov, a senior economist at the Troika dialogue investment company as saying the ruble's real rate should sink to the level of 2004 even under an almost improbable scenario suggesting that the price will stick in the brackets of 35 dollars to 40 dollars per barrel next year.

In a nutshell, given the inflation over all these years the ruble should fall another 30% to 40%, thus sinking to the mark of 38 rubles per dollar already next year.

Still, other economists say the Central Bank made a dramatic error as it renounced a resolute support of the ruble in September and October, Nezavissimaya Gazeta writes. Now it will most obviously abide by the tactics of a smooth devaluation, albeit the oil prices may go downhill.

Yet analysts are not inclined to over-dramatizing the situation, says Kommersant daily. It quotes Yulia Tsepliayeva, a Russia and CIS analyst at Merrill Lynch, saying that the possibility of oil sliding to 30 dollars per barrel or lower than that is small enough.

"Although we're considering a scenario implying that oil will trade at around 30 dollars per barrel next year, we still think it's highly theoretical," she said. "Of course, oil may touch that mark at some point because there's nothing oil can't do, but anyway it won't stay there for long, as a number of countries simply can't afford producing it when it's so cheap."

Merrill Lynch suggests that next year's averaged price should be in the neighborhood of 47 dollars per barrel. "If you think of 50 dollars, that's not a bad price at all because by and large nothing horrible will happen to Russia then - if of course the government's rescue plan works well and we manage to avoid a crash landing," Tsepliayeva said. "We feel even more optimistic about the prospects for 2010 when we think a barrel is likely to sell for 70 dollars, which is fairly good."

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Source: Itar-Tass