Concerns of a global trade and economic downturn due to President Trump’s trade war and a new global crisis have impacted oil prices. The OPEC also contributed to the decline in oil prices: just one day after President Trump announced his tariffs, it decided to triple the oil production: instead of the originally planned 135,000 barrels per day, the oil production will be increased by 411,000 barrels per day in May.
On Monday, after the decline in oil prices on the world market, the price of our Urals crude oil fell to 50 US dollars per barrel. This price is below the upper limit of 60 US dollars per barrel. However, it is much more important for Russia that it is significantly below the oil price calculated in the state budget.
The decline in prices of different oil varieties began on Thursday and Friday and continued on Monday, but on Tuesday, both the world oil prices and the price of Urals crude oil ended their downward trend and rose again. Nevertheless, the long-term factors that cause a price decline are still not gone. Major investment banks such as Goldman Sachs have already started to lower their oil forecasts for this and next year.
According to Vladimir Chernov, analyst at Freedom Finance Global, “In case of further escalation of trade wars, world oil prices will remain under pressure. Then the Brent oil price would fall to 55-60 US dollars per barrel, while the Urals oil price would fall to 45-52 US dollars per barrel. If Trump begins to negotiate with most countries about the cancellation of new tariffs in exchange for a reduction in the trade deficit, the prices of ‘black gold’ would recover and possibly return to the range of 65-70 US dollars per barrel Brent crude oil and 60 US dollars per barrel Urals crude oil. We consider the second scenario to be more likely.”
However, there are a number of factors that could reverse this trend and cause oil prices to rise quickly again.
According to Chernov, this could happen, for example, if the US initiates a military action against Iran and the escalation of trade wars is contained – in this case, the oil prices for Brent crude oil could rise worldwide to 70-75 US dollars per barrel.
Igor Yushkov, expert at the Financial University of the Russian Government and the National Energy Security Fund (NESF), believes that “the second factor that could push up oil prices is a change in position by the OPEC, which has so far maintained silence. But even verbal intervention can change this situation. It will be enough if the OPEC says that it will suspend its earlier decision to significantly increase oil production from May until the end of April due to the changed market situation. OPEC members can, for example, postpone the start date for the increase in oil production from May to July or reduce the volume of the increase to the previously planned 135,000 barrels per day. This will support the oil price.”
The third factor that could push up oil prices is a possible reduction in the refinancing rate by the US Federal Reserve.
Igor Yushkov comments on this: “In order to stimulate business development in the US, the US Federal Reserve could reduce interest rates. This would be logical: the industrial production in the US could suffer from the price increase or the unavailability of some components and parts from Europe and China. The US Federal Reserve has already done this during the crisis in 2008/2009, when it introduced quantitative easing, i.e., lowering the benchmark interest rate. As a result, large amounts of cheap money flowed into the US. As a result, oil futures and other term transactions were bought and the oil prices rose. Now the Fed could try to achieve the same effect.”
If such major events do not take place, the world will follow a gradual scenario of market equilibrium: there will be some time, perhaps a few months, before the low oil prices affect oil production. First, the US shale oil projects will have to reduce their production, as many of them are already unprofitable with an oil price of about 55 US dollars per barrel.
According to the NESF expert, oil prices of around 50-60 US dollars per barrel would be painful for all oil producers, including Russia.
The Russian budget assumes a much higher oil price of 69.7 US dollars per barrel and a weaker exchange rate of