The return of the bears: how long will the cheaper oil and the falling rouble


Premature optimism

From the beginning of June both the global oil benchmarks — oil grades Brent and WTI entered into a cycle of decline. The price of Brent declined by 19.69% since the June peak ($52,51 at the close of 9 June to $41.8 in the course of trading on 29 July), the fall in WTI from peak exceeded 20% (from $51,23 at the closing on June 8 to $from 40.77 in the course of trading July 29). The fall in WTI in July on the new York Mercantile exchange has been the most important monthly decline in prices in 2016.

Back in the spring and early summer a number of major energy institutions talked about the fact that the oil market returns to balance supply and demand. Oil prices gave reason to be optimistic: in particular, the price per barrel of Brent the minimum values in January ($27,88) in June reached $52,51.

In may and June, the International energy Agency (IEA) in its reports concludes that the balance needs to be achieved by the end of the year. Among the factors is called an increase in demand and the reduction of production in countries outside OPEC (especially in USA). The market moving to balance spoke and OPEC Secretary General Mohammed Barkindo, and the Minister of energy, industry and mineral resources Saudi Arabia Khalid al-falih. A substantial drop in prices has not led even to the failure of the April negotiations in Doha between the oil-producing countries to freeze production levels. In the report of analysts of Goldman Sachs in mid-may, noted that excess oil production were overcome much faster than expected (this happened because of supply disruptions from Nigeria and Canada). The Bank predicted that the average oil price in the second half of 2016 will be $50 per barrel.

The bulls prematurely believe that the rebalancing of the oil market — a done deal, said Bloomberg chief strategist at commodity markets at BNP Paribas Harry Chilingaryan. He believes that the rebalancing will only take a little more than expected”.

Why falling oil prices?

The current decline in oil prices have several explanations. Impact published on July 27, statistics of U.S. Department of energy, according to which crude oil inventories in the United States, contrary to expectations, rose by 1.7 million barrels. (for the first time since may). In addition, gasoline inventories in the United States, according to the American petroleum Institute (API), reaching a record 1984 level for this time of year. Moreover, ceased to act factors that influenced the price increase in the spring. Was restored shipments to Canada, which in may declined due to forest fires. Nigeria also increases the level of oil supply, which in may fell to the lowest level in 30 years due to a series of attacks by militants in the oil-rich areas of the country. It is the disruption of oil from Canada and Nigeria were forced to think that the excess in the market has been overcome, although in reality it is not, said Bloomberg head of commodity market research Commerzbank Eugen Weinberg.

The reasons for the decline in oil prices is not limited to excess supply and the restoration of uninterrupted supply. According to analysts Goldman Sachs, a much greater risk for oil prices is a further strengthening of the dollar and a possible interest rate hike by the fed. Bank analysts believe that excess gasoline is not the cause of falling prices, as it reflects the situation from the point of view of the sentence and not the demand. “Uncertainty in the pace of recovery of the balance in the oil market made the dollar the main driver of lower oil prices,” — said in their report.

What will happen to oil prices?

A week ago the number of drilling rigs, according to the American oil and gas company Baker Hughes, increased by 14, to 371, showing growth for the fourth consecutive week. If the number of working rigs continues to increase, a reduction in oil production in the United States will stop, but pressure on prices will persist, said Financial Times.

“U.S. production continues to slowly decrease, and we expect further decline in the third quarter. But the oil companies progressively re-commissioning of drilling rigs, so the production should stabilize by the end of the year,” said BP CEO Bob Dudley on July 26. According to EIA, in September, the production will be 8.1 million barrels. a day, but in November and December will grow to 8.3 million barrels.

The Economist Intelligence Unit predicts drop in the price of Brent crude oil to $40,34 per barrel, said Reuters. Economist in the field of energy Philip Verleger predicts a decline to $40 per barrel by the middle or end of September in the case of falling gasoline prices. “In the absence of supply disruptions do not be surprised if a barrel of Brent will drop to $40 or even $37 by mid-late September”, — he said FT.

Gasoline stocks in the world increased to 500 million barrels. Fuel prices in the U.S. reached the lowest level since the summer of 2004. As the FT notes, in the U.S. market, where almost every ninth oil barrel in the world, a huge excess of fuel reserves exceed the value of 2015 is 12%. As the summer season ends. According to Verleger, the consumption of gasoline in the United States in 2016 increased relative to 2015 of just 1.1%.

The energy information administration (EIA) recently downgraded its forecast for demand growth for gasoline for the remainder of the year by 1.5% — from 220 thousand per day to 130 thousand barrels.

Several analysts of the global investment banks, including Citigroup Inc. and Societe Generale SA, by contrast, expect that, in spite of the current bearish cycle, the markets will recover by the end of the year. “Offer drastically adjusted, and we see that it is falling much faster than demand since the fourth quarter of last year”, — quotes Bloomberg analyst Barclays Mishina Mahesh.

According to analysts at Barclays and Commerzbank, the price of oil will recover to $50 per barrel by the end of the year. But at the same time, said Weinberg of Commerzbank, market sentiment has worsened so much that in the future will inevitably drop prices to $40. “The excess supply will decrease,” he says. But the market is now deaf in one ear. In the beginning of the year was dominated by excessive pessimism in June, traders have fallen into excessive optimism, and now again prevailed pessimistic moods”.

Analysts polled by Reuters believe that this year oil prices will rise due to increased demand, which should help to offset the bearish cycle. According to their estimates, in 2016, the barrel will cost an average of $45,51 — by $0.31 higher than the June forecast. According to the Agency, it is the fifth revision of the forecast to a significant increase in Brent crude prices. “In 2016 we expect significant growth in world oil demand of 1.4 million barrels. per day, and moderate growth in 2017, primarily in China, India and Africa”, — quotes Reuters the words financial analyst Raymond James Luana Siegfried.

The offer still exceeds demand, but production failures that occur including due to geopolitical instability, hinder its increase, says oil analyst George, Beleric. According to the participants of the Reuters survey, against the background of improvement of dynamics of demand and supply futures for Brent crude oil in the fourth quarter, will cost about $51,15 per barrel in 2017 — $58,63, and in 2018 — and $66,28.

What will happen to the ruble?

After a brief period of weakening of the ruble dependency on oil prices in July, the national currency has again started to follow them, said the chief economist of PF “Capital” Evgenie Nadorshin. “In July, while the price of oil was around $50, the ruble was strong enough due to the influx of capital to Russia against the background of news about Brexit and Turkey. But a wave of influx, apparently, weak, oil at $40 a barrel and illusion to reduce the correlation of oil and the ruble cleared”, — says Nadorshin.

In the baseline scenario of Gazprombank, the price of oil at $45-50 per barrel in the second half of 2016, the national currency should gradually return to the values of 70-75 rubles per dollar. The strengthening of the ruble is possible only in case of increase in oil prices or supply of portfolio investment, a positive trend which could lead to the strengthening of the national currency to 50-55 rubles per dollar, which, however, is unlikely, notes in his review of the analyst of Gazprombank Dmitry Dolgin.

The market doubted the prospects for global oil demand, says the Nadorshin, and is now visible increase in the activity of drilling in the shale deposits of the United States. It is possible that the oil price can break above $40, predicts the economist. According to him, at such values the dollar will be worth more than 70 rubles. While Nadorshin notes that much also depends on the current account. “If it is not stored at least the inflow of speculative capital, 70 rubles per dollar possible in the coming days and no further drawdown in oil prices,” — he warned.

Chief economist at Eurasian development Bank Yaroslav Lisovolik considers that special pressure on the ruble will be in the fourth quarter of this year, when the country faces substantial debt repayments. Nevertheless, oil still remains one of the key factors affecting the value of the ruble, says the economist. According to his forecasts, the average exchange rate of the national currency in the second half of this year amounted to 67 rubles per dollar and an average oil price will be $45 per barrel.