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Oil for $60: will it last long?

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Reaching the price of $60 per barrel, oil breaks two-year maximums and is not going to decrease for the fourth day running. The rise was supported by statements made by Crown Prince of Saudi Arabia Mohammed ibn Salman al Saud on prolongation of the oil output cuts and Russia’s involvement. However, the oil prices were also influenced by the unclear situation in the Iraqi Kurdistan, to which Turkey threatened to cut oil exports after the independence referendum. The United States has been registering decrease in oil reserves for several weeks running.

Experts say, the oil prices may both stay the level of $60 and drift lower and fluctuate within the range of $50-$60.

“The coming months will show how shale oil producers will react. This will determine how stable the price of $60 is now,” believes Marsel Salikhov, the head of the Economic Department at the Institute of Energy and Finance. According to him, the recent months have shown that the balance of demand has been strengthening in the global market.

Igor Yushkov, a senior analyst at the National Energy Security Fund, forecasts that the oil price can roll down to $55.

“The oil prices will continue to fluctuate, but it is already fine that the price corridor is getting higher,” he says. He agrees that a lot depends on response of the US shale companies: “If the shale companies in the USA continue raising output, oil prices will be within $50-60 limits; if anything happens in the Middle East or Venezuela, they will be about $60. Anyway, in half a year the price will become a norm.”

Vasily Tanurkov, Deputy Director of the ACRA Ratings, says that it will be clear if the oil price will be stable at $60 after a meeting of OPEC in late November. “If the OPEC countries agree on prolonging the production freeze, the price will remain. Otherwise, it will drop,” the expert believes. He notes that the shale oil production might lose its influence upon the oil price as the business paradigm is changing.

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“While previously shale companies tried to increase production, now their stakeholders urge increasing efficiency of the projects. In the current situation, it is getting more and more difficult to attract investments. It explains why there has been no significant increase in drilling, and final EIA data on drilling is lower than expected. Oil servicing companies and oil producing companies do admit that the pressure upon prime cost. For instance, sand has become more expensive. Meanwhile, it turned out that decrease of the prime cost in shale oil production was only by 30% due to development of technologies. In 2015, it was believed that if oil price is over $65, there will be explosive growth in output. Last year, the barrier was brought down to $60. I won’t be surprised if in the end of the year it will be back to $65. So, there is certain growth potential without freezing the output further. The prices will be growing steadily, but it is too early to speak of the $60 oil price as a stable price,” he says.

Cut and freeze in oil output cannot be eternal, believes Marsel Salikhov, the head of the Economic Department, the Institute of Energy and Finance. “Now, the OPEC+ strategy is based on prolonging the output freeze. However, sooner or later, it will come to an end, and it makes sense to decide now what to do further. Probably, they should start decreasing the freeze gradually in order to escape shocks. Lifting the output freeze is unavoidable, it does not matter when it will happen, next March or in the end of this year,” he notes.

Analysts say, the Russian budget may gain up to 1 trillion RUR if the oil prices get stable.

“I would rather not hurry to forecast revenues, as current assessments, most probably, are tied to the budget with a lower oil price,” Salikhov stresses.

Meanwhile, Igor Yushkov is sure that the Russian government will gain most profit, if they keep at the $60 level.

“Our tax legislation stipulates that if the oil price ifs above $40, most revenues go to the state budget,” he says. Stable extra revenues will be sent for lowering the budget deficit and raising the expenditures. “The government will try to raise living standards during the election campaign,” Yushkov forecasts.

Permalink: eadaily.com/en/news/2017/10/30/oil-for-60-will-it-last-long
Published on October 30th, 2017 08:46 PM
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