At the end of last week, the oil price rose slightly, however, it did not influence the views of analytics and experts regarding perspectives of oil market by end of 2015. Even, forecasts of the Western and Russian experts coincided. By the year-end, average price of the oil will make $52-54. This is a forecast on Brent crude. WTI forecasts are more optimistic. Western Texas oil may reduce only $2-3.
We intentionally mentioned Russian experts. Because, macroeconomic consequences of oil price in Russia are feelable. It firstly reflects itself in devaluation of rouble against USD and Euro. Oil price decline caused RUB devaluation. Consequently, in the beginning of last week, USD made RUB 70, Euro – RUB 80. Of course, there is a link here: two-day increase of oil price caused Euro to make RUB 73, USD – RUB 65. This link between oil price and rouble’s value strengthened after refusal of government and Russian Central Bank the currency intervention in the market.
It’s clear that floating currency exchange rate in oil exporting countries depends on supply-demand factor and if the demand raises during oil price decline, the supply falls. Moreover, demand for currency increases when the process starts and in turn, it automatically increases exchange rates of USD and Euro. And the process rotates.
Oil price decline is related to two main factors: 1) decline of production activity in China and relevantly, decline of demand for energy carriers; 2) increase of oil production around the world. The second factor is more serious. According to the western experts, the current situation regarding increase of oil production is worse than 1986, when the analogical situation was observed. Remind that too increase of oil production in 1986 arose political factors and caused collapse of USSR economy. Oil price reached $35 in the beginning of 80s (presently equal to $100), while it fell to below $10 (presently equal to $20) and USD did not exceed $20 for some years. Consequently, oil producing countries face serious financial losses. Analogical situation is observed again. Moreover, oil producing countries don’t intend to reduce production in order to stabilize the prices, on the contrary, increase production to compensate the losses. When the situation is assessed, it’s difficult to perform heart-warming forecast about oil price.
According to non-official information, Russian government and financial circles of the country are testing the situation that USD will reach RUB 100. This has not formally confirmed, but is not surprising either. Rather, it is so conclusive. Probably, other oil producing countries also prepare for negative development of processes, saving the current situation unchanged. For instance, Kazakhstan is preparing for fall of oil price to $30-40. However, in Azerbaijan, the state budget does not reflect negative results yet. Revenues of state budget in the first half of 2015 made AZN 7.8 bln, up 1.2% from forecast. This is surprised because base price of oil in the state budget was considered as $90. But this year, the prices are not expected to rebound. We’ll discuss this issue again…
It’s an estimable that AZN 3.562 bln came from SOFAZ. In other word, 46% of revenues is a spending of money, but not a budget earning. Because SOFAZ funds are for charge. Of course, it’s possible to leave behind the hard periods, when the oil price will fall to minimum, by having certain resources. Especially, let’s take into consideration that the country’s leadership does not want to wreck the budget basing on socio-political opinions. Moreover, it’s possible to compensate a part of losses by administrative currency levers. That’s the base price of oil in the state budget makes $90 (unreal figure for current situation), however exchange rate of USD is set at AZN 0.784. As the result of devaluation by Central Bank of Azerbaijan, USD makes AZN 1.05, up 34% from exchange rate for budget. What does it give us? Everything is so simple: transfers to budget or SOFAZ increased 34%. A part of losses can be compensated by these funds. The situation is the same in Russia, but they changed the exchange rate of rouble to floating exchange rate: This conforms with market economy and helps budget. All of these processes make population’s condition worse. Decline of rouble causes increase of consumption prices, which leads to psychological disbelief. Besides, this process is reflected in the real salary. For example, during the first seven months, real salaries slid 8.8%, in July – 9.2%. Why July? If we take a look on this year’s prices of oil, the answer will be clear: As you see, the most decline was observed in July. In parallel, personal incomes unexpectedly increased in July – 1.4%. How did it happen? Simple answer – population sells its reserves. Or for example to exchange currency reserves to rouble also revenue. Of course, the citizens do it that to provide monthly costs. People change their currency, they got at the end of 2014 – when dollar rose, to rouble and spend. There is another point approving this claim – compared to a month earlier, retail sale rose 0.1% in July. The forecasts are not heart-warming – economists think that the population will say good-bye to their currency reserves n September.
Regarding oil market, the situation will not improve in the near future. According to JP Morgan analytics, if sanctions against Iran continue to be halted and this country returns to oil market, then density will be at the highest level and the prices will decline. Today’s pessimist forecasts may be the highest level of optimism at that time.
Vahab Rzayev – Expert of APA Analytical Center
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