Russian central bank expects low oil prices to continue for a while
The Russian central bank warned Kremlin policymakers that the United States and OPEC could flood the oil markets and cause a similar price collapse to what occurred in the 1980s, which led to the fall of the Soviet Union.
The warning was issued weeks before Russian President Vladimir Putin and U.S. president Donald Trump began negotiations to end the conflict in Ukraine.
Trump warned that he would impose additional sanctions against Russia if a peace agreement was not reached. He has also promised to increase U.S. production of oil and urged OPEC leader Saudi Arabian to pump more to support the global economy.
The central bank issued the warning during a February discussion presided by Prime Minister Mikhail Mishustin and watched by.
The central bank does not specify under which scenario OPEC or the United States would flood the market, nor how likely it is that this could happen.
The central bank has cited oil prices in its reports but never explained how an extended low oil price cycle might occur.
Separately, the Economy Ministry also presented a presentation at the meeting. It cited other risks for the economy such as weakened investor activity, increased costs and "bad loans".
No indication exists that OPEC plans to change its supply policy in a way that would result in a dramatic increase in production.
The United States could increase its oil production further. However, the majority of the increases are likely to come from non-OPEC producers like Guyana, Brazil, and Kazakhstan where major oil companies ramp up their production.
One of the slides that was reviewed by the said person listed among the risks "a significant rise in production outside OPEC and in the United States".
The report also stated that OPEC's spare capacities were near records highs and equaled the volume of Russian crude exports.
After the high oil price period from 1974-1985 there were 18 (!!!) The presentation slide used three exclamation points to emphasize the fact that the oil price has been low for 18 years.
OIL PRICES FALL SOVIET-WIDE WITH THE SOVIET FALL
Since the Soviets found one of the largest hydrocarbon deposits in Western Siberia, in the years following World War Two, Russia has been both its strength and its weakness.
High oil prices allowed the Kremlin for decades to spend money on foreign political campaigns, such as supporting governments in Cuba, Angola, and Vietnam.
The economy was thrown into turmoil when prices dropped, with dramatic geopolitical effects such as the collapse of the Soviet Union in 1991.
In the 1980s, the oil price crash made it impossible for Soviet Union to compete with the United States on the battlefield. Financial problems worsened, leading to the fall of the Soviet Union. Russian President Vladimir Putin described this event as a tragedy.
Oil prices are currently around $70 per barrel - this is a level that Russia can live with, as their budgets assume a price of $69.7 per barrel.
Igor Yushkov is a professor of the Financial University of the Russian Government. He said that the bank was worried because of the low oil prices and the strong rouble.
He said, "The budget probably isn't doing well because we are already at the end of the month and have not met the budget parameters planned for 2025."
Since 1991, low oil prices have caused Moscow to experience several financial shocks. In 1998, the country defaulted on foreign debt when oil prices dropped to $10 per barrel.
After the oil price fell because of U.S. mortgage problems, Moscow was forced to use its reserve and fiscal buffers in 2008 to stabilize the economy and reduce unemployment.
The oil prices have also fallen steeply over the past 15 years, including during the Coronavirus pandemic. However, the short-term nature did not test the Kremlin’s resilience.
Putin, who spoke with the influential Saudi Crown prince Mohammed bin Salman in early this month, stressed the "importance" of the OPEC+ deal for the global oil market's stability.
The Kremlin read out the transcript of the phone conversation. "The commitment of Russia, Saudi Arabia and the United States to adhere to the obligations under "OPEC Plus", was emphasized."
International Energy Agency (IEA), estimates that OPEC’s total spare production capacity – idle output that could be brought online – stands at approximately 5.3 million bpd. This is close to Russian oil exports and fuels.
Saudi Arabia said that it can increase its production from 9 million barrels per day to 12 million in a matter of months. (Reporting and editing by Guy Faulconbridge, David Evans)
(source: Reuters)
