The other day, Brent oil saw its price dive right below the $40/b psychological level for the first time in 7 years. Apparently, such a low price level prevents Russian oil exporters from exploring and developing new oil fields. But the biggest worry is, the Russian economy is going to see another shock if oil prices are still this low in 2016.
Last Tuesday, Brent oil dived below $40/b, a major psychological level. The last time the price was that low was February 2009. Later on the day, the price regained a bit of the lost ground to close the trading day at $40.4/b after plunging to $39.85/b. This was a follow-up to Monday’s plunge when oil prices went down by 5.3% within a single trading day. It should be noted that the sellout came as the result of Friday’s OPEC summit, which resulted postpone the decision on production quotas till next time.
Officially, the cartel’s production is at 30 million barrels a day while the actual figures have been well below the threshold for a while. Some experts believe that OPEC is currently producing 31-32 million barrels a day on average. At the same time, OPEC’s hesitation has to do with the uncertainty caused by Iran’s comeback to the global market of crude oil. Iran is a major oil exporter, which means it may seriously affect the big picture. The thing is that Iran will only expand the overall supply of crude oil to the global market, which is bad news for the bulls. Even though the global supply of crude oil is going to expand, OPEC is not in a hurry to cut its oil production while trying to preserve its market share. We remind you that 12 months ago OPEС decided to abstain from cutting its oil production, which further translated into a market crash and a continuous downtrend brining oil prices 40% down.
Such low oil prices will let Russian oil companies survive without being able to profit and develop their businesses. At this point, they have already frozen oil projects with the annual production capacity of 26 million tons. Even in summer, when oil cost over $60/b, Russian experts said that the local oil companies could barely profits and in order to avoid another shock, Russian needs oil prices to recover at least up to $80/b. Still, last month they predicted no recovery until mid 2017.
The existing market situation makes Russian oil companies be extremely cautious of planning their budget for the next year. For instance, LUKOIL reports that the 2016 budget is being planned based on the average projected price of $50/b. At the same time, the company reports that new oil projects will be possible only if the price is within the range of $65-90/b. Gazpromneft sticks to the same policy - $45/b for the next 3 years.
