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OPEC Be Warned: Russia Battens Down the Hatches for Oil at $40

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OPEC Be Warned: Russia Battens Down the Hatches for Oil at $40

Ksenia Galouchko
BloombergMarch 24, 2017


Oil pumping jacks, also known as nodding donkeys, operate in snow at an oilfield operated by Bashneft PAO in the village of Dyurtyuli, Russia, on Thursday, March 3, 2016. Bashneft is an upstream and down stream oil & gas provider which explores, produces and refines its own oil and gas which it extracts from brownfield reserves in the Russian Federation. Photographer: Andrey Rudakov/Bloomberg

Perhaps the Bank of Russia knows something the world doesn’t.

While analysts in a Bloomberg survey see the price of benchmark Brent crude -- which trades at a small premium to Russia’s Urals export blend -- rising 16 percent from current levels by the end of the year, oil’s 10 percent 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.”

Policy makers 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. As the central bank honed its forecasts, it also gingerly resumed monetary easing, pointing to the “uncertainty” in the oil market as a factor for its “conservative” forecasts.

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.

‘Upside Surprises’
Even as oil has recovered, Russia’s tendency to stick with the more conservative scenario is “positive” as it “leaves room for upside surprises,” according to Viktor Szabo, a bond fund manager at Aberdeen Asset Management Plc.

Forecasting oil is no game for the Bank of Russia. Its 65 percent 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 percent of budget income in 2016.

Even as the historic OPEC supply-cut deal helped halt oil’s collapse, pushing it up to $55 a barrel and setting the stage for Russia’s economic recovery, the central bank is taking nothing for granted.

The correlation between the ruble and oil has declined this year, falling to the lowest since August 2015, according to data compiled by Bloomberg. As crude slid below $50 a barrel this week, the Russian currency barely budged, weakening less than 1 percent, because its carry-trade appeal largely offset the dimming outlook for energy.

“Once (actually more than once) bitten, twice shy,” said Elina Ribakova, an economist at Deutsche Bank AG in London. “The central bank and the Finance Ministry are sticking to the conservative $40 oil scenario because they want to be ready for and protect themselves against the worst-case scenario.”

More from Bloomberg.com

http://finance.yahoo.com/news/opec-warned-russia-battens-down-163419978.html
 

the_shootist

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Makes you wonder how they were all doing when oil was $100 bucks a barrel for all that time.