Expert on oil market collapse: “An ordinary Russian should not wait for shocks”
President of Finam Group Vladislav Kochetkov about the impact of panic collapse in oil markets in our lives
On 20 April on the New York Stock Exchange, it was the last day when oil futures were traded for delivery in May: from yesterday, the markets switched to June delivery. It was the most dramatic day for WTI in its history: in the effort to prevent physical delivery, traders sold off their futures. As a result, the quotes fell to zero and then — into the negative zone. This nightmare closed at -38,45 dollars per barrel. In parallel, the quotes of the Russian brand also collapsed — Urals also passed the zero mark down but still closed at $3 per barrel. Realnoe Vremya spoke with expert analyst, President of Finam Group Vladislav Kochetkov about what to expect in the near future and what is happening on the world markets.
What is happening in the oil markets
I think the market is afraid of uncertainty. On the one hand, the depth of global economy's decline is still unclear. On the other hand, forecasts that are adjusted every 2-3 days by leading international institutions are becoming more and more pessimistic. For example, let's look at the forecast for the Russian economy: 3 weeks ago, pessimists of international institutions said that it would fall by 3-5%, but now everyone says that it will fall by 15-20%. The situation is similar in the world economy and in many other countries. And worsening forecasts for a falling economy inevitably means that demand for oil will decline.
The decline in demand is exacerbated by the fact that tanks are full. There have already been cases when producers paid extra for the release of storages — this started a few weeks ago on less popular brands of oil. All this encourages nervousness in the markets. In parallel, there are speculative actions of professional traders — bear speculation on the price of oil.
What negative oil prices mean
Imagine you have a production. What you produce is stored in warehouses. But the demand has stopped for some reason. Warehouses are full. It will be too expensive to stop production — you will then have to invest significantly more money to make it work again. Therefore, nothing is impossible if you even pay a little extra for your warehouses to be vacated. It's just a sale. Everyone knows that at a good sale you can buy clothes at cost and sometimes even cheaper. Unfortunately, the same sales occur in the oil market to avoid the need to “freeze” wells.
There is no place to store oil in the US, but Urals also went into negative zone. Did Russia also run out of storage capacity?
In Russia, the situation is slightly different. Storage capacity is available, but it is also limited. And most importantly, a number of Russian producers produce what is known as high-viscosity oil. They can't just freeze wells. By the way, you may have noticed that negative prices were first offered by producers of high-viscosity American oil, for whom it is more difficult to freeze their production. If you freeze Russian deposits, it will be expensive to defrost them, and some of them, judging by experts' comments, will be impossible to restore at all. Therefore, in order to maintain production and earn money in the future, some companies will go to some loss.
Although, I think state support measures are possible here. You can also see that the bulk of the money that has been allocated so far under the anti-crisis programme is still going to large businesses. In one form or another — whether direct compensation, tax benefits or credit relaxation — oil companies will win back their loss, and maybe even earn a little money. Although formally it will look like selling oil at a loss, a state support can compensate for it.
How long will this last and whether oil will return to “normal” levels
It is clear that this cannot continue for a long time, including because the market will align itself. On the one hand, there are OPEC actions, on the other hand — low prices will help to reduce production by the same shale producers.
As a result, after some time, demand will balance, and oil will grow — I think to the level of $40 or higher. Forecasts of when this will happen vary greatly: some say two quarters, some say a year. In my opinion, it is quite realistic that we will see these prices in the fourth quarter of 2020. Nevertheless, we can expect the market of cheap and very cheap oil in the next six months.
What an ordinary person should afraid of, further ruble collapse awaits us
What is happening will inevitably affect us all because oil price is the key parameter of the Russian budget, which affects the exchange rate of the ruble. Therefore, it is likely that our income will decrease slightly, especially if we count in dollar terms. But still, the average Russian should not expect any special shocks yet.
First, the Central Bank still has the resources to maintain the ruble exchange rate.
Second, there has been an influx of investments in the Russian economy over the past week. The reason for this is the support programme implemented by regulators in both Europe and the United States. It aims to print a lot of money. This strategy is very clear, and it was developed during the crisis of 2008-2009. “In any unclear situation, print money” — this is the position of both the ECB and the Fed.
So there is more money in the markets now than ever before, so some of it will inevitably flow to Russia — and it is already flowing. Because despite the shocks that we have experienced, our economy has turned out to be quite stable, and there was no significant increase in inflation. In other words, it turned out that the very macroeconomic stability that our macroregulator has been constantly talking about actually exists. This may encourage further inflows of funds to Russia.
To sum up, we have two factors — the inflow of investments and the possible active actions of the Central Bank. They, despite the low oil, are likely to stabilize the ruble somewhere in the range between 70 and 80 rubles a dollar. The range is wide, but it is impossible to predict more accurately — too many non-system factors affect this.
What foreign investors are investing in Russia now
It is difficult to talk about a clear distribution — as a rule, there are no detailed statistics. Usually the first money — the most conservative — still comes not to specific industries but to the state debt — OFZ (Federal loan obligations). Then there are the dividend securities, and here are a lot of different good ideas — oil industry, metallurgy, and in the longer term — retail. Retail, by the way, looks very attractive because in the current conditions consumer demand is moving to essential goods and products. In general, there may be many different ideas, but the first wave is still OFZ. And it is already noticeable, according to statistics.
Nothing fatal is happening?
The collapse of oil prices itself is a dramatic and noticeable event, but it all depends on how long the economic shutdown will last. The extent of the spread of the coronavirus is unclear, but for now everything depends on it. It is also not quite clear how long the economies of Europe, Russia and part of the United States will stand idle.
If this is a matter of the next few weeks or months, then most likely the end of the year will show a more positive situation than today. And if the situation stretches out for several months, I can't even predict. In this case, most likely, the Great Depression is infinitely better.
But I'm still an optimist. I think Europe will start working in May, China is already working (although the statistics for it are not the most favourable). So I think that the fourth quarter will bring us a recovery in oil prices and in all related issues — the budget, ruble and everything else. The Russian economy and financial system have the resources to do this.