Cheap oil shock could see $30 per barrel before stabilizing around $70 – Russia is close to financial collapse

Canadian Natural Resources Ltd. Chairman Murray Edwards said crude oil may sink as low as $30 a barrel before rebounding to stabilize at $70 to $75 a barrel, the Financial Post reported.

Oil has dropped 38 percent this year and, in theory, production can continue to flow until prices fall below the day-to-day costs at existing wells. Stevens said some U.S. shale producers may break even at $40 a barrel or less. The International Energy Agency estimates most drilling in the Bakken formation — the shale producers that OPEC seeks to drive out of business — return cash at $42 a barrel.

Oil’s decline is proving to be the worst since the collapse of the financial system in 2008 and threatening to have the same global impact of falling prices three decades ago that led to the Mexican debt crisis and the end of the Soviet Union.

Russia within three years of financial collapse at $70 per barrel oil and maybe 18 months or less with lower prices and other problems

“Saudi Arabia, U.A.E. and Qatar can live with relatively lower oil prices for a while, but this isn’t the case for Iran, Iraq, Nigeria, Venezuela, Algeria and Angola,” said Marie-Claire Aoun, director of the energy center at the French Institute for International Relations in Paris.

Russia has about $244.5 billion of available reserves if its holdings are counted without the government’s two sovereign wealth funds, Special Drawing Rights and the country’s reserve position at the International Monetary Fund, according to Bloomberg calculations. The value of Russia’s international reserves has declined for 11 straight weeks, losing $10.5 billion in the seven days through Oct. 31 to $428.6 billion, the largest drop since May, the central bank said today.

[Economist] Russian companies have to pay back the $130 billion of external debt that comes due between now and the end of next year.

About $170 billion of Russia’s assets sit in two giant wealth funds, the Reserve Fund and the National Wealth Fund (NWF), and much of what is in these funds could prove illiquid or inaccessible if called on to meet short-term financing needs. Cash from the $82 billion NWF is committed to long-term infrastructure projects, says Sergei Guriev of Sciences-Po, a French university. The NWF has also provided money to VEB, the Russian development bank, to finance construction at the Sochi Olympics. The loans by which it did so have been “restructured” to allow delayed repayment. Mr Guriev says many people believe the money to have been embezzled.

has sufficient reserve funds to weather the short-term storm, the medium-to-long term is another question entirely, says Natasha Udensiva, a managing partner at Eurasia Energy Associates and a lecturer in international affairs at Columbia University. How long might the Russians be able to maintain their current stance? “They say they’ll be fine for two, three years,” Udensiva tells the National Review. “I think they’ll be fine for at least one year and a half. Despite this huge inflation and all the terrible things going on in the country, they still have a lot of assets.”

Last month, Moody’s Investors Service cut Russia’s credit rating one level to its second-lowest investment grade, citing the erosion of its reserves among the reasons. S&P affirmed Russia at BBB-, the lowest investment grade, following a one-level cut in April, the first in five years.

Moscow gets more than half its budget revenue from oil and gas; for every $10 drop in the per-barrel price of oil, Russia loses up to $14.6 billion a year in revenues, according to Alfa Bank. Another $40 per barrel drop would cost Russia almost $60 billion per year.

China is the world’s second-largest net importer of oil. Based on 2013 figures, every $1 drop in the oil price saves it an annual $2.1 billion. The recent fall, if sustained, lowers its import bill by $60 billion, or 3%.

SOURCES – Bloomberg, Economist magazine, National Review, USA Today, Business Insider