Russia is battening down the hatches for a Biblical collapse in oil revenues, warning that crude prices could stay as low as $40 a barrel for another seven years.
Maxim Oreshkin, the deputy finance minister, said the country is drawing up plans based on a price band fluctuating between $40 to $60 as far out as 2022, a scenario that would have devastating implications for Opec.
It would also spell disaster for the North Sea producers, Brazil’s off-shore projects, and heavily indebted Western producers. “We will live in a different reality,” he told a breakfast forum hosted by Russian newspaper Vedomosti.
The cold blast from Moscow came as US crude plunged to $35.56, pummelled by continuing fall-out from the acrimonious Organisaton of Petrol Exporting Countries meeting last week. Record short positions by hedge funds have amplified the effect.
Bank of America said there was now the risk of “full-blown price war” within Opec itself as Saudi Arabia and Iran fight out a bitter strategic rivalry through the oil market.
U.S. oil futures for January delivery fell $1.14, or 3.1%, to $35.62 a barrel on the New York Mercantile Exchange Brent, the global benchmark, fell $1.80, or 4.5%, to $37.93 a barrel on ICE Futures Europe.
Both lost about 11% for the week, putting them down a third for the year and at their lowest settlement since the financial crisis. U.S. oil last settled this low in February 2009 and Brent in December 2008.
Mr Oreshkin said oil prices of $40 would force the government to bleed its reserve fund by 1.5 trillion roubles next year, or 2pc of GDP.
Standard & Poor’s says the budget deficit has reached 4.4pc of GDP, including local government shortfalls. A further $40bn is needed to bail out the banking system.
“They just don’t have the money. The deficit is heading for 5pc of GDP,” said Lubomir Mitov from Unicredit.
In its monthly report, the IEA said world oil-demand growth will slow to 1.2 million barrels a day in 2016 after surging to 1.8 million barrels a day this year, as support from sharply falling oil prices begins to fade. Continued strong OPEC production and extra Iranian oil hitting the market next year will swell global inventories by 300 million barrels.
“The biggest danger is that the [Russian] reserve fund will be exhausted by the end of 2016. They will then have to monetise the deficit or cut real spending by another 10pc. They can’t cut defence so that leaves social welfare,” he said.
Bond markets in Russia are shallow. The country cannot hope to borrow abroad on any scale as long as it is under Western sanctions.
Saudi Arabia’s leaders are fully aware of the Kremlin’s painful predicament. They appear certain that they can outlast Russia in a long duel. By the time we find out which of these two petro-giants is stronger, both may be on their knees.
China’s central bank on Friday signaled its intention to change the way it manages the yuan’s value by potentially loosening its peg to the dollar. That could be a bad sign for oil demand in the world’s second-largest oil consumer, said Dimitry Dayen, senior research analyst at ClearBridge Investments, which manages $103.9 billion in assets.
“If they devalue their currency, which is a little bit of what’s happening today, the commodity becomes more expensive locally and that could drive demand lower,” Mr. Dayen said.
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