Oil swings: why oil prices have been falling for the second week in a row

Global oil prices have continued to decline for the second week in a row amid the intensifying trade confrontation between the United States and China, as well as expectations of a slowdown in global demand. There are other factors as well. The current drop may be just the beginning of a new wave of volatility, experts and market analysts say. For more information, see the Izvestia article.

Geopolitics versus the barrel

Olga Orlova, head of the Industry department at the Institute of Oil and Gas Technologies, calls the escalation of the trade conflict between Washington and Beijing the key reason for the price drop. According to her, China's retaliatory measures, including the refusal to import American LNG, have increased uncertainty in the commodity market.

— The trade war between the United States and China will cause greater damage to the United States, which will not be able to buy the necessary electronic, electrical, energy equipment, and heavy machinery products. At the same time, China has already refused to import American LNG, increasing purchases of gas from alternative sources," says Tamara Safonova, PhD in Economics, associate professor at the Institute of Economics, Mathematics and Information Technology of the Presidential Academy, director of Naans Media.

Pressure on quotes

In addition, the pressure on quotes is also increasing from expectations for the actions of the US Federal Reserve, a strengthening dollar and weakening industrial demand in Asia, adds Olga Orlova.

— Now oil is not so much an energy resource as an indicator of global economic nervousness. Any instability between large trading blocks automatically affects quotes," she noted.

In the current situation of turbulence, which is provoked by a new round of US trade wars and changes in the configuration of international economic unions, it is the stability of the OPEC+ alliance that is a factor in stabilizing the market, Tamara Safonova believes.

OPEC+ in monitoring mode

The OPEC+ coalition, despite the continued rhetoric about unity, has not yet developed a clear strategy to respond to the current price drop. Saudi Arabia and the UAE are demonstrating their readiness for new cuts, but they are waiting for signals from Russia and Iran.

— Now there is a negotiation: on the one hand, the Persian Gulf countries want strict quotas, on the other — some members, including Russia, are restrained in their obligations. Domestic consumption in Russia is growing, and cutting production at a time when the domestic market is reviving is an extremely unpopular measure," says Igor Rastorguev, a leading analyst at Amarkets.

At the same time, the rejection of new cuts may lead to a new round of price war, as it already happened in 2020.

— Against this background, coordination with OPEC+ is not only a matter of economics, but also of geopolitics. Any signal of a split in the alliance will instantly bring down prices," the analyst notes.

Scenario 1: oil at $40 is stressful for the budget

If the oil price drops to $40 per barrel in the coming months and stays there, the consequences for Russia will be tangible. The share of oil and gas revenues in the structure of federal revenues still exceeds a third, which makes the economy sensitive to external price fluctuations, experts say.

— The budget formula takes into account both the price of Urals crude oil and the exchange rate. But even if the ruble exchange rate starts to adjust after the price decrease, this will not fully compensate for the shortfall in income. Especially if the price drops below $50 per barrel and stays there for a long time," says Igor Rastorguev.

An additional source of pressure may be the adjustment of the damping mechanism, a tool that makes it possible to smooth domestic fuel prices. With low prices for petroleum products, the amount of subsidies to companies is decreasing, but at the same time the budget burden on social obligations is increasing, says Ekaterina Kosareva, managing partner of the analytical agency VMT Consult.

— If the fall lasts longer than two months, the authorities will have to adjust the budget parameters or activate the NWF. "An alternative scenario is to revise commitments towards restraint," she notes.

— Subsidized payments in the form of a damper will depend on the price of petroleum products on the foreign market. When the oil price drops, the amount of the damper decreases. Thus, in addition to world prices, the Central Bank's monetary policy will also have an impact on budget revenues," Tamara Safonova noted.

The oil and gas revenues of the Russian budget depend both on the price of Urals oil on the foreign market, as well as on the exchange rate of the national currency and the amount of payments from the budget of the damping component, reverse excise tax and the investment component, Tamara Safonova said.

— At $40 per barrel, we are going beyond the budget rule. This means that the receipts to the NWF will not only be reduced, they may not be at all. The Ministry of Finance will be forced to "print out" savings or resort to borrowing, says Ekaterina Kosareva.

In such a scenario, accelerated tax adjustment measures, increased excise taxes and the freezing of part of investment programs are possible in the domestic market. Oil companies will also feel the pressure, especially small producers and independent refineries that will be outside the subsidy zone.

Scenario 2: Neutral — $60-65 in the coming months

If prices stabilize in the range of $60-65 per barrel, Russia will be able to maintain the balance without emergency measures. In this case, the budget rule will be respected, the payments under the damper will be predictable, and the NWF will remain stable.

— This is the basic scenario. He assumes that OPEC+ will maintain current production parameters, and geopolitical pressure will remain within the framework of rhetoric, without new sanctions or trade shocks," says Olga Orlova.

According to her, in this scenario, the Ministry of Finance will be able to carefully adapt the budget without resorting to austerity. However, investment costs will remain under pressure.

Scenario 3: Positive — return to $75-80

Oil will return to the $75-80 mark if the situation between the United States and China stabilizes and OPEC+ makes additional reduction decisions.

"In this scenario, the Russian budget is not just balanced — there is room to increase spending and strengthen the ruble," Kosareva notes. — It will also strengthen the export position and reduce the need for adjustments to the tax system.

However, analysts warn that this scenario is optimistic and requires synchronicity of actions in several areas at once, from foreign policy to logistics.

Izvestia sent a request to the Ministry of Energy of the Russian Federation regarding the possible impact of oil prices on the budget, as well as with questions about the prospects for further price reductions, but at the time of publication there was no response from the department.