Oil prices could stay above levels of$ 30 – investors looking forward to hearing from key exporters of decisions on new deal production cuts designed to halt the deterioration of the fundamental balance of the oil market.
In the current environment, it becomes obvious that the destructive influence of viral factors on the global economy will be massive – the world economy this year may go to decrease. With such significant pressure on economic activity worldwide, oil demand is also greatly reduced – already now the volume reduction can exceed 15 million barrels a day, in the future the next few months, the volume reduction can reach levels 20-25 million Such a large-scale failure demand returns to the market in a state of fundamental imbalance in the form of “canopy” on the supply side, thereby producing a considerable pressure on prices.
In these introductory stabilization of the oil market for many producing countries is becoming increasingly necessary, and this necessity is reflected in the convening of an OPEC meeting+ Thursday and discuss the situation in the wider G20, to be held on Friday.
the Kremlin has not considered the reduction of oil production in the United States help to stabilize the market
At the same time, we see that any consensus among exporters is still there – this time the issue of balancing the oil market in the midst of a global recession involves significant political components, we are talking about not only a rebalancing of the oil market, but the balance of power on it.
the Main factor of uncertainty is the format of the new transaction. In our view, Russia and Saudi Arabia (the”locomotives” of the earlier Covenant OPEC+) indicate that they will be ready for active production cuts only in case if such a transaction and will join other exporters, mainly the United States. In turn, the rhetoric of States on this issue is very controversial and, at least for now, do not fallows you to form an adequate assessment of the American position.
against the background of such a high level of uncertainty over a new deal to reduce output, we consider several scenarios for the oil market until the end of 2020. Note that the ruble is in this perspective will also vary depending on the price conjuncture of the oil market, however, the influence of oil is not the only factor. In our view, risks a return to instability in global markets, as the risks of renewed decline remain at elevated levels – the magnitude of viral pressure on the world economy still can not be fully assessed. Thus, with the advent of new adverse shocks in the market of rouble currency may weaken in spite of the movement of oil prices.
In the framework of our scenario, “without a deal” we expect to exporters this week will fail to reach a compromise, an agreement to reduce production will not be concluded, the oil exporters will continue to price confrontation. In this case, oil prices may for a time “fall” to levels $17-25 investors will be disappointed and frightened by the lack of compromise, which would entail an emotional sale of the asset.
However, if the peak of virus activity will be completed in late spring to early summer months, and the world economy will proceed to recovery in the second half, we believe that at the end of the third quarter of the price of oil can form $30-35 and continue moderate growth by the end of the year. The ruble at such input in the spring term will continue to be formed in a wide range of 75-80 rubles per dollar, and at the end of the year, may strengthen to the levels of 70 to 73 rubles to the dollar.
US Department of energy expects reduceds oil production in the country
Our optimistic scenario of a “full deal” requires an agreement between the world largest exporters a significant decrease in oil production volumes close to 10 million barrels per day, up to the end of 2020. Note that the final decision on reductions may substantially exceed these levels (for example, 15 million barrels per day). This scenario assumes that the parties can find a compromise, and the deal will include both “traditional” parties in Russia and Saudi Arabia, and new – in the United States, European and Latin American producers.
the Initial market reaction to the format of the agreement can also be emotional – oil prices towards the levels $35-40, the ruble temporarily strengthened in the range of 72-75 rubles to the dollar.
Meanwhile, we note the fact that even the real understanding (and hence implementation) of large-scale reductions in production may not return the market to balance quickly. By the end of March, many exporters, particularly the middle East, increased its production and, most importantly, for virtually the entire first quarter and increased volumes of export deliveries especially in Asian areas. This has led to what is now the commercial storage capacity of oil are at high levels of loading oil in storage is as consumers and producers (e.g., massive volumes hosted by Saudi Arabia in supertankers on the water).
In such circumstances, even large-scale reduction in the production of crude oil will not be able to quickly see the market from surplus sales and consumption can be implemented through the purchased inventory in storage. In this regard, after the emotional recovery of oil prices could follow their “normalization” to levels 30-35$. According to our estimates, balancing market need 4 to 8 months. Thus, a more sustainable recovery in oil prices to$ 40 seems possible in the future, the end of the third quarter. At the end of the year oil prices could consolidate at the levels 44-48$. Under such a price situation in oil, the ruble at the end of the year can be formed in the range of 68 to 71 rubles per dollar.
in Addition to the two above-mentioned scenarios, we see possible and alternative variants of “semi-deal”. In one case, “traditional” exporters Saudi Arabia and Russia will again take on the burden of the production cuts, while “new” members, including the United States, limited to formal statements that their production this year will be to demonstrate “market” decrease (production will not decline due to the direct quota reduction, and because of the actions of producers reducing production in an economic downturn).
as a result, the production cuts could reach 4-7 million barrels per day before the end of 2020. The initial market reaction may be disappointing, oil prices back in the range of $22-27, the ruble will weaken to 77-79 rubles per dollar. When these decrease production to balance the market need more time. The oil can close the year at $35-40, the exchange rate will be about 70 rubles to the dollar.
the EIA Experts predicted the decline of oil production in the U.S.
In another case, the talks of importing oil may be a worsening of relations between the US and Russia. States had previously signaled that it considers the possibility of introduction of tariff restrictions and sanctions against the “culprits” of the oil collapse. Assuming that the situation in Russia will develop according to the negative sanctions scenario, Russian production, being under sanctions, could be substantially reduced.
For the balance of the oil market “drop down” production of Russia can become a positive factor in the rebalancing, while the Russian economy and the ruble will suffer a serious blow. It can be assumed that the exchange rate of the Russian currency in the amplification of the existing problems and even sanctional rigidity may fall below the level of 90 rubles per dollar.
At the same time, in the framework of the oil negotiations, if the parties find a compromise and partial production will be reduced by the same 4-7 million barrels per day, including through the efforts of the Russian Federation, the Russian party may obtain a kind of “approval” from Western partners for the “salvation” of the oil market. This “approval” can be expressed including in the form of reduction of the risk of sanctions. The ruble could strengthen in the range of 70-75 rubles per dollar and to end the year at levels of 66 to 69 rubles per dollar.
in summary, we note that the final scenario for the oil market and the ruble may be a set of different factors from the above scenario scenarios.