US and European oil refiners increase demand for Russian oil

What can bring oil prices down, whether new wave of the pandemic can collapse the quotations, why the decisions of the US Federal Reserve, and not just OPEC, have become key for the market

Oil quotes break records almost every month, the black gold market is recovering from last year's collapse. The price per barrel of Brent crude oil rose to $75 per barrel from February's $58 for six months. In the interview with Realnoe Vremya newspaper, Igor Yushkov, an expert of the Financial University under the Government of Russia, leading analyst of the National Energy Security Fund, told what could bring oil prices down, whether a new wave of the pandemic could collapse the quotations, why the decisions of the US Federal Reserve became key for the market — and how Russian Urals oil has become in demand in recent years... thanks to American and European refineries.

“The deal on Iranian nuclear programme can bring oil prices down”

We are seeing a steady increase in oil prices: after last year's failures, it has won back all the losses, and now Brent futures already cost more than $75 per barrel. Can something put pressure on oil this autumn, what events or phenomena can unfold the uptrend?

There is the OPEC+ agreement, which is designed to keep the price at a relatively high level. At the same time, maybe Russia would like to produce more oil, even if the price is lower. We would be satisfied with a corridor of around 50-60 dollars per barrel. But Saudi Arabia insists that prices should be higher, so we are still increasing our production quite modestly. So the OPEC + agreement becomes a factor that keeps oil prices from falling.

Besides, we see that US shale projects are not actively recovering. This is happening very slowly, compared to the rates that were before, when they could quickly increase production. Because they [the owners of shale oil companies] are also afraid and do not understand how the American authorities will act in the near future. We see that permits for new fields are not being issued, that the construction of oil pipelines is being stopped, and “green rhetoric” (in April of this year, President Joe Biden said that the United States intends to completely stop harmful emissions into the atmosphere by 2050 — editor's note) squeezes out many oil and gas projects. Therefore, investors prefer not to invest in their development but to cash the funds — in fact, to take profit in the form of dividends. As a result, the growth is not as fast as one would like. And this keeps the price of oil at high levels.

The deal on the Iranian nuclear programme and the lifting of sanctions against Iran can bring oil prices down. Although Iran is now a member of the OPEC+ agreement, no quotas apply to it. But if sanctions are lifted agaisnt the state, it will be able to quickly increase the volume of oil production, somewhere by about 1,5-2 million barrels a day. Certainly, this will hit the price very hard, taking it to the area of 40-50 dollars per barrel. Then, it may even be necessary to revise the parameters of the OPEC+ agreement, somehow slow down the restoration of oil recovery.

But now we do not see a progress of the agreement under the Iranian nuclear programme, sanctions are not being lifted. Therefore, so far, all other things being equal, everything is quite stable.

Epidemic and oil: the main thing is that people move

The experience of last year demonstrated the unpredictability of the oil market in the light of the coronavirus epidemic. How big is its impact on oil demand today? After all, after the delta strain, the following ones appear, also quite dangerous.

Hardly anyone can predict the pandemic itself today. But let's assume abstractly that the coronavirus pandemic begins in the same form as it was last year — that is, when countries fought it with quarantine measures, kept people in cities, in their homes. Accordingly, people will again move less and spend less fuel. Last year, at the peak of the epidemic, this led to a decrease in oil consumption by 30% from the normal level. But if it starts again — we can expect a drop in consumption not by 30%, but by about 10-15% for sure.

Some experts and world leaders believe that total vaccination leads and will continue to lead to a growth of the world economy — which means that the demand for oil will accelerate.

I can say this: if countries do not restrict the movement of people provided there is a vaccine, then mass vaccination will help to avoid a drop in oil demand. That is, the key here is to allow people to move. This means that they will spend gasoline, aviation fuel, and other types of fuel — and the trend for high demand will continue.


Cheap money from the Fed pushes oil up

From your point of view, is the oil price formed today by the balance/imbalance of supply and demand, or is it still speculation and speculative expectations?

It's not like a speculative moment, but rather a financial factor. Because as a measure to combat the consequences of the coronavirus, all states began to support their economies. They lowered the refinancing rates — and, therefore, the loan rates, so that enterprises could take money at a low interest rate and resume halted production facilities. That is, all states began to help business by the same scheme, quite classic — cheap loans.

And when, first of all, the US lowers the refinancing rate, some of this cheap money ends up on the stock exchange, because investors start buying everything with it, including oil futures. Let me remind you that even after the crisis of 2008-2009, oil was expensive — and now we see that it is expensive. Because the regulator of the United States then also threw a huge amount of new dollars into the economy, lowering the refinancing rate. But if the Fed starts raising the refinancing rate and, accordingly, loans become more expensive, part of the money supply will leave the exchange. And then oil may slightly decrease in price.

When talking about oil trends, they often talk about the popular pair — Brent and WTI. Can the behaviour of Russian brand Urals go against its “colleagues”?

In general, we see that all brands are in the same trend. The following can be said about the Russian Urals oil brand: in recent years it has become very popular. And, by the way, in relation to other grades, it is becoming more expensive. For some time last year, Urals traded even at a premium against Brent, and not at a discount, as usual. It's just that back in 2019, the United States imposed sanctions against Venezuela, banning its refineries from buying Venezuelan oil — American refineries began to look for some acceptable replacement, and it turned out that it was very profitable to buy just Russian Urals and Russian fuel oil (they mix fuel oil with light grades of oil). Thus, we pushed Venezuela out of the American market and became the second largest oil supplier.

At the same time, many oil refineries in Europe are already configured for Urals. Therefore, the demand for Urals is large and the demand for it is high. And, most likely, the Urals quotes are unlikely to go down in the medium term, in relation to other grades of oil, but rather, they will grow.

Biden is not the boss of oil

You have repeatedly mentioned American policies and American decisions that have a strong impact on the oil market. It turns out that out of all world players, including Russia, OPEC and China, it is the US that oil quotes depend on?

I wouldn't say that, traders look at both. But no one really looks at what Biden says. Everyone looks at what signals the Fed gives, what is happening with the statistics of oil production and oil reserves in the United States. And, accordingly, they look at the decisions of OPEC+, at the implementation of the OPEC + deal, at the organisation's plans to increase production, which are being adopted.

Some political statements are considered only in extraordinary cases. For example, if Biden suddenly announced the lifting of sanctions against Iran — such loud statements would affect the market, yes.

Do you believe that by the end of the year the price of Brent will soar to $80 per barrel?

I don't think so. We constantly increase the volume of oil production in the framework of the deal with OPEC+. Maybe not much, but we are increasing it. And the United States are slowly growing up. It turns out that demand is recovering, and supply is increasing. Therefore, I do not think that oil will somehow go up far. And if the Fed also raises the refinancing rate, then oil will drop from the current $75 per barrel to about $65.

Sergey Afanasyev