Drop of oil prices in Russia

Updated September 8, 2008

   Within the last two months, the price of oil went by 27,3% down. Thus, one more problem joined the core troubles of Russia’s investors after the war conflict in Georgia - the severe depreciation of the key Russian treasure. If this process doesn’t stop, Russia’s stock market will continue falling.

Stake on the dollar

On July, 11, the world oil prices reached their historical maximum. On that day, the closing price at the New York Mercantile Exchange (NYMEX) was $143,33 per one barrel of Brent crude, and the highest price of the deal during the trading session reached $145,11 per barrel of Brent. Russia’s Urals crude didn’t fall behind: on July, 11 the closing price was $139,88 per barrel, and within the trades the price was reaching $141,66 per barrel.

After that day, the prices for oil started falling at the world markets: $130, $120, $115 per barrel… The market resembles an airplane that fell suddenly into the spin and loses rapidly the altitude. On September, 3 the barrel of Brent crude cost $104,27, and Urals - $102,42, thus the lowest price within the trading session totaled $101,93.

Thus, the quotations of oil fell by 27,3% for almost two months. Moreover, the important level - $100 per barrel - is under the threat from the psychological viewpoint. The world oil prices can again become two-digit in the nearest future.

At the same time, the US dollar was strengthening, though not so rapidly. The peak of its fall to the euro has coincided almost with the peak of oil prices. As for the euro, its highest price was fixed on July, 11 at the level of 1,5940 $/€ according to the trades’ results. As for the separate deals, their record was fixed on July, 15, when the dollar rate fell below 1,6 $/€ - on that day, the euro cost $1,6038 within the trades. At this time, oil started to correct from the peak values: on July, 15 the barrel of Brent crude cost $136,65, that was 4,7% lower the maximum.

The dollar strengthening that was quite stable at the beginning started in mid-July. By August, 1 the euro/dollar pair was traded at the level of 1,5564 $/€, that was 2,4% lower the maximum. Besides, by August, 1 Brent crude fell to $125,16, or by 12,7% from the maximum.

Then, the dollar strengthening accelerated, and within August it grew by 7,02% to the euro, and on September, 3 the euro cost $1,4472 already. Thus, within the examined period, the overall dollar strengthening was 9,21%.

Stake on slowdown

It is better to remind that oil and other primary products were acting as a safety asset for a long time. Almost the whole year - from mid-2007 to July, 2008 - the players were escaping from the loan crisis into oil and other commodity futures. However, they had nowhere to go, since the quotations of stocks were falling rapidly at the western markets, and the profitability of bonds (the US national Treasures foremost) approached the inflation, and was even lower, after the Federal Reserve System (FRS) cute the rates.

However, in spring of 2008, the new tendencies at the US stock markets appeared. The overall exchange indices were falling still because of the crisis financial sector. However, some securities, of the high-technology sector foremost, demonstrated the growth. Moreover, some bonds were demonstrating the tendency towards the quotations growth. Thus, the instruments for bull operations appeared at least in the short-term prospect. 

At the same time, the market players, including the most active hedge funds, had the strong opinion about the "overbought" speculatively oil market. The analysts’ calculations were quite different: some of them estimated the speculative component of the price at 20%, and some of them - at 40%. Still, all of them agreed that the equilibrium oil price - taking to account the balance of supply and demand - is not $145 per barrel, but much lower.

The fears for the deceleration of growth rates of the overall world economy and of the post-Olympic China in particular aggravated the pessimistic situation. The market participants were dissatisfied with the increase of quotas set by OPEC countries in mid-July, as well as with the CFTC’s measures (Commodity Futures Trading Commission at the US markets) directed to the limitation of speculations with the oil futures.

As a result, the majority of the market participants started fixing the income, i.e. to sell commodity contracts, after the July maximums. Since the equity market hasn’t inspired any hopes, the American Treasures or other dollar-nominated assets are bought now because, at the moment, they are more attractive due to the better macroeconomic statistics as compared to Europe. This process resulted in the demand for the US dollar, and that strengthened its positions to the euro and to the other world currencies. However, this led to the slump of oil prices, since it is easy and more pleasant to buy assets at the growing price. Later, the processes of oil prices drop and the dollar strengthening resonated intensifying each other.

However, the dispute - whether oil prices follow the euro/dollar pair or, vice versa, the currency pair follows the oil prices, reminds the dispute - which came first: the chicken or the egg. Although it is better to mark that in this case, oil was the first to start the correction.

Stake on cartel

The present situation influences negatively on Russia’s stock market. From July, 11 to September, 3, Russia’s RTS index went by 26,7% down, and that almost coincides with the amount of the fall of the world prices for oil (27,3%). Within the same period, the RTS oil and gas index lost 26,6%, and that almost coincides with two previous indices.

The fall of the Russian indices is somewhat lower than the drop of the world prices. Russia’s market tries to resist, even despite such negative factors, as the war conflict and the outflow of the foreign investors. Obviously, it is related to the fact that the US dollar strengthening (and the import appreciation) is somewhat a positive aspect for the Russian economy. However, the negative effect of the oil prices drop prevails.

Only a powerful player that can change the present tendencies at the oil market can save Russia’s stocks from the fall. OPEC can become such player: at least, almost all analysts surveyed believe in its efforts. The meeting of the leaders of the oil cartel’s countries-members takes place in Vienna on September, 9. The top issue on the agenda is "the limitation of oil prices drop at the world markets". The past experience shows that OPEC countries can renounce their private interest in favor of common ones, i.e. to cut quotas when the price falls.

In addition, such factors of oil prices support, as the forecasts of the mid-term surplus of this type of the natural resources, should be taken to account. For instance, in August, when the prices were falling severely, the International Energy Agency (IEA) announced the forecast on oil surplus of about 12,5 billion of barrels per day to 2015, and it is 14,5% from the present extraction level (86,5 billion of barrels per day).

In the short-term prospect, Russia’s private investors have to hope that on September, 9 OPEC cuts the quotas and restrains the prices. Moreover, the heating season coming to the Northern hemisphere will help the prices to recover. So, if the market participants face the two-digit oil price in the nearest future, it will not exist long.