Mikhail Krutikhin: “We’ve made two mistakes with oil — we underestimated our competitors and overestimated ourselves”
The expert: coronavirus has only pushed the world economy into recession, and Russia's exit from OPEC has only made it worse
Russian oil exports to China has fallen by a third due to the coronavirus pandemic, which has already led to the collapse of black gold quotes: US oil prices have fallen to a 17-year low ($25 per barrel), Brent — to $27,8 per barrel. Mikhail Krutikhin, an oil and gas sector analyst and partner at RusEnergy consulting agency, told Realnoe Vremya why, despite the fact that the real oil price differs greatly from the speculative one, Russia is not able to influence it by closing its wells — which will lead to the ultimate victory of Saudi Arabia, which will occupy new market niches through dumping. Nevertheless, both the breakdown of the agreement with OPEC and even the coronavirus are only additional factors that accelerated the global recession, according to the expert, which is unlikely to end by the end of the year and will hit the Russian economy hard.
The price of Russian oil is still 3 dollars lower than the market price
Mikhail Ivanovich, these days there are regular news that affects oil prices. How much its price is formed by a real imbalance of supply and demand, and how much by speculation?
That's a tricky question. The prices we see that the futures prices. In this case, it is the June futures. That is, the paper that should be realised sometime in June. Real prices — the cost of physical oil — differ greately. Besides, if you look at how our Russian Urals oil is sold, it turns out that its price is still $3 lower than the market indicators that we see on the charts. This is the first point.
Second, the price of oil that we see is formed by two factors. The first is supply and demand. But now their balance is such that the supply is much greater than the demand, and therefore the pressure on prices from this side is very strong and thorough. Trying to sell, oil suppliers give, of course, all sorts of discounts. This is the buyer's market, who dictates the price. But about 70% of the oil price is formed by the financial market, where major players who play these “pieces of paper”, oil futures, react to any news. They have computers, machines that respond to news headlines in microseconds.
Plus, there is, of course, the desire to play: volatility of oil prices is very profitable for them. They can artificially push the price of oil up or push it down. And players have a much stronger influence on the market than supply and demand. Therefore, it is impossible to predict anything today, because we must take into account both the fundamental factor of supply and demand, and the battle for volatility, “profits on the jumps”.
Plugging a well for a while so that it doesn't work is impossible in 80% of cases in Russia. Because in this case, in 2-3 days everything will freeze there, and it will be cheaper to drill a new well than to repair a frozen one
Why Russia can't influence the oil market by “turning the tap” on wells
Can you estimate the non-speculative price and the “real” oil, so to speak?
No. This is impossible to do in principle. I can only say that today the market belongs to the buyer who can dictate anything. He will say, for example, you have tankers dangling in the sea, you can not sell at this price, let me buy all the oil from you for $10 per barrel.
Without going into the financial markets and limiting ourselves to the pure “mechanics” of supply and demand, is it possible for Russia to raise the price of oil today? Roughly speaking, can Russia tap off oil to do this?
Russia is not able to do this for many reasons. First, our oil companies do not quite follow the government's instructions. They have their own plans. Second, in Russia, most oil wells are located in the North and in difficult conditions. Debits of these wells, that is, the flow of oil, it is 10-50 times — and sometimes thousands of times! — less than in the same Saudi Arabia. Plugging a well for a while so that it doesn't work is impossible in 80% of cases in Russia. Because in this case, in 2-3 days everything will freeze there, and it will be cheaper to drill a new well than to repair a frozen one, for various reasons: due to crystallohydrates, low temperature, etc. You can't plug our wells and then open them again.
Coronavirus has only pushed the world economy into recession, and Russia's exit from OPEC has only made it worse
There has been a lot of discussion about Russia's decision to withdraw from the agreement with OPEC to extend the restriction on oil production. It was said that as a result of the collapse of the deal and dumping announced by Saudi Arabia, oil prices collapsed. But today, in the midst of the coronavirus epidemic and worldwide decline in production, we understand that they would have collapsed anyway?
That's right. But we are, frankly speaking — and everyone understands this, on the slope of the economic growth cycle. There is a correction, the world economy is going into recession, and maybe even into stagnation. And against this background, there have appeared two accelerators [of the recession]. The first accelerator is Chinese coronavirus, which has a very strong effect on this…
The second accelerator is a sharp exit of Russia, such a boorish one, from the agreement with OPEC. After that the Eastern people were terribly offended and began to produce and sell oil at huge discounts
So the coronavirus is not even the main factor that influenced the global recession?
Yes, and even before that, the world economy was slowly sliding down. It's just an accelerator, but very powerful. The second accelerator is the sharp exit of Russia, such a boorish one, from the agreement with OPEC. After that, the Eastern people were terribly offended and began to extract and sell oil at huge discounts, offering anything to annoy Russia. This was done by Russia, it should be noted, completely ugly, disgusting. And most importantly, the Russian authorities, first of all, underestimated the potential for endurance, survival and production of their competitors, whether American or Saudi. Those who made the decision made an error…
“They pretended that we are a great power, to rude to everyone”
Igor Sechin [the head of Rosneft], conditionally, did it?
Well, the decision was made by Putin, but Sechin voiced his position to the Saudis. They also terribly overestimated the Russian potential for survival and production. Here are two of their mistakes: they underestimated their competitors and overestimated themselves. They pretended that we are a great power, to rude to everyone.
Well, but you can also ask the same question to Saudi Arabia, which announced that it will increase oil supplies by 26% in April. What is the point in increasing supplies, if, roughly speaking, now, against the background of the recession and epidemic, no one needs oil in this volume?
To occupy market niches for the future! Push out competitors and create a new picture of the market.
Yes, but who, conditionally, in principle, will buy in such volumes? Even tankers have become more expensive today, the demand for them has increased, because cheap oil does not find demand, and it is now going to be stored on tankers for months....
Indeed, it is true. Not only that, China now has all its reserve tanks full of oil. But Saudi Arabia does so with a view to the future. The Saudis have decided that their strategy now is to win by volume, not price. They are selling as much oil as possible at any price. This means that they acquire contracts for the future, concluding them with those partners who will cooperate with them after the crisis subsides.
At the same time, Russia can neither reduce production in response [to increase oil prices], nor increase it today. Besides, the cost of Russian oil production is higher than that of Saudi Arabia
Saudi Arabia will eventually defeat Russia in the oil market
Who can predict today that the crisis will not last until the end of the year?
Well, the crisis can last a year, maybe a year and a half, or even two years. But oil, it's a long-term player. The Saudis will fill these market niches, and they have a perfectly sound approach to this. They are pushing Russia out. At the same time, Russia can neither reduce production in response [to increase oil prices], nor increase it today. Besides, the cost of Russian oil production is higher than that of Saudi Arabia.
Given the fall in Chinese demand for Russian oil and demand from European countries for obvious “viral” reasons, is there any possibility for Russia to find other export markets?
I don't see that as a possibility. We had more or less fixed markets. Moreover, Rosneft has found itself in a difficult situation because it is obliged to supply oil to India from Venezuela, and Venezuela has become closed in fact, Rosneft's trading subsidiaries are under sanctions, and it is simply impossible to export oil from there. In other words, Rosneft must now supply its own oil, which it produces in Russia, to India. This, first, is expensive, and second, it means in turn, the failure to fulfill contracts with the Chinese. But China is waiting for this oil, since Rosneft borrowed money from the Chinese for future supplies, and now we must somehow pay with oil.
“It will be bad. I don't expect anything good”: how global recession may end for Russia
If our oil companies are in trouble with export demand today, can Russia “digest” unsold oil at its petrochemical plants?
No, it can't do that. First of all, we do not have such a demand for petrochemicals. Second, Russia's domestic consumption of oil and gas is not growing; it has been flat for many years. What to do with this oil?
By the end of 2020, can we predict anything at all in terms of the stability of the Russian economy and the oil market, or it is impossible to do this in principle because of, let's say, the “fog of a war”?
Well, we can say with confidence that the global recession will last for more than a year, perhaps two years, then it will go into some kind of stagnation (for another four years). And Russia is part of the world picture. Its stock market has already collapsed, and I think all its shares, the wrappers and the lottery, may eventually become worthless. It is possible that in view of this investment climate, those who bought OFZ [Federal Loan Obligations], will be attracted from Russia, especially non-residents. This will be a big blow: they will sell them for rubles and buy dollars with them. In general, it will be bad. I don't expect anything good. And since we have such an overestimation of our own potential, failures for us will be even more bitter and unpleasant.
This will be a big blow: they will sell them for rubles and buy dollars with them. In general, it will be bad. I don't expect anything good
Do you agree with the estimates of some of our officials that we will have to accept for a long time that oil prices will not rise above 30-35 dollars per barrel?
I will not make specific price forecasts, given the strong volatility in the market. But I would recommend that the opinions of government officials be treated with great caution…