Russia Does Not See any Risk of Oil Price Drop

Russia’s economic minister recently said that there is no immediate risk of a sharp drop in per barrel oil prices, although they may potentially be affected in the long run by rising demand for alternative sources of energy like shale gas.

The current oil prices will not rapidly fall. If that were to happen, that would mean another crisis similar to what occurred in 2008 to 2009. The threat of such a crisis, perhaps stemming from the eurozone, is not completely gone. However, it is not as big as it was in the past summer, said Andrei Belousov.

His comments resonate his deputy’s statements who recently said that the price of each barrel of Urals, a Russian oil blend which typically hovers a little lower than the cost of Brent, should reach at least $100 this year.

There is a higher chance that oil prices won’t fall, said Andrei Klepach, since Brent is trading at about $114 per barrel, a price that is higher by $3 compared to its average rate of $111 per barrel last year.

Klepach further said that the geopolitical conflict in the Middle East and Africa, together with China’s economic situation, is presently having a bigger influence on the crude market.

OPEC’s Secretary General Abdalla Salem el-Badri also recently stated that he is not worried of an oil price collapse as he anticipates the market to stay balanced throughout 2013.

Oil plays an essential role in Russia’s economy, contributing to over one-tenth of the crude output worldwide and contending with Saudi Arabia as the world’s highest producer. Hydrocarbon revenue fuels the budget of Russia and supports the ruble; any sharp decline in the prices of oil would frustrate the hopes of the government for continuous growth.

Predicting oil prices accurately therefore has a significant role in corporate borrowing, budget planning and local spending plans. But ministries tend to undervalue the cost, giving them slight breathing space.

Nevertheless, sharp declines in the oil prices have caught Russia off-guard more than once, just like what happened in the 80′s and recently in 2008. In the latter, officials of the government had predicted a crude price per barrel of $250 just a week prior to the Lehman Brothers collapse that led to the world financial crisis and a sharp drop in the price of oil.

By: Chris Termeer