As you probably know, on December 14, 2015, oil prices set a new 7-year low. Later on they managed to recover a bit from the low. Still, most experts treat this rebound as a temporary timeout before another move down to new lows.
In the meantime, the Russian central bank named a new stress scenario - $40 per barrel. The Russian Ministry of Finance doesn’t deny a move below $30 per barrel. This leads more and more economic experts to believe that the new financial reality may force Russia to change its economic model, which will further translate into political changes as well.
It should be noted that since early 2015, Brent oil has already lost over 30% of its value. As you probably know the major reason for this downtrend is the excessive supply of crude oil amid declining demand, which causes a huge oversupply and pushes oil prices further down. According to the EIA and other agencies, the situation is not going to change for the better in the near future. On the contrary, the situation may get even worse give the fact that the U.S. Congress approved U.S. oil exports. At the same time, OPEC has been reluctant to cut its oil production and prevent the oversupply form growing even more. Another major bearish factor to consider is the fact that Iran is going back to the international market of crude oil after years of Western sanctions. This will only add some fuel to the fire.
The Russian central bank says that once the average price in 2016 is $40/b, the Russian GDP is going to shrink by 2-3% while the rate of inflation is expected at 7% in this case. Still, Russian experts believe that most Russian oil companies may well survive a short-term period of extremely low oil prices around $10/b. Still, if this is going to be a log-term tendency, eventually the companies will have to cut down on their production and development. Oil is extremely important for the Russian economy and budget. The 2016 budget is based on $50/b, which is a very unlikely price for 2016 given the current reality.
At the same time, Masterforex-V Academy experts also say that the technical picture points to the reactional nature of the current recovery. The thing is that most investors are reducing their exposure to the market in advance of New Year and are going to return to the market in mid January 2016. This is the time when oil prices may well resume their move down. Technically speaking, if that’s the case, the closest major target is the 2008 low at $33,18/b.
Lower oil prices mean lower income for Russia and bigger budget deficit, which further translates into higher taxes and inflation (consumer prices in particular) as well as lower salaries and pensions. At the same time, the Russian government may suspend the financing of some ambitious projects. Also, poor standards of living may cause social tensions in the country.
In particular, the Russian middle class, which makes 20% of the population will have to practice austerity and spend their savings. The amount of those living behind the poverty line is definitely going to increase drastically.
More and more experts believe that this is the result of poor economic policies. Russian politicians have been highlighting the topic of being heavily dependent on crude oil and saying that it is necessary to do something about it but still doing nothing all that time. Now it is the day of reckoning for the Russian government for being ignorant and idle. They say that the costliest mistakes are those deriving from neglecting trivia.
More Russian politicians have to put up with the fact that Russian is now living in a completely different environment with sanctions, low oil prices, lack of foreign investments. With that being said, the new environment requires a new economic model and structural reforms. The first step is to create something in between the existing and required models. That is why such changes are inevitable in the near future, especially if oil prices are still going down.
