/ world today news/ The union of Saudi Arabia with Russia for the sake of oil irritates the USA and the European Union, because rising oil prices are hitting their pockets and economies. Exporters themselves must break the trend of cheap oil. For the Russian budget, the first quarter turned out to be quite meager. Will it be possible to change the situation?
Oil has risen for the fourth week in a row. This was facilitated not only by the decision of OPEC+, together with Russia, to cut production, which left the US very unhappy. Since Biden’s visit to Saudi Arabia, OPEC+ has already cut production twice, despite the US president’s request to the contrary.
Signs of a worsening global market situation and a global weakening of the dollar, while pushing up the price of gold, also pushed oil higher.
Oil prices have already risen five dollars – and are still rising. And that means higher risks of a global recession, as consumer countries will spend more on energy and have less money for other needs. More expensive oil will slow the economic growth of importing countries. On top of that, it will stimulate inflation and all previous attempts by the US and the EU to suppress it will be futile. This is a double whammy for buyers.
The published reports of OPEC and the IEA say one thing: in the second half of the year we should expect an increase in the shortage of oil on the market, which means that prices will continue to rise.
Can we talk about the beginning of a new cycle of expensive oil? A market economy goes through cycles of growth and decline that follow one another. “These cycles can be short-term – up to four years, medium-term – up to 15 years and long-term – up to 30 years. Now there is an obvious shortage of oil in the oil market, but it is not too big, so it is still difficult to talk about the end of the current cycle and the beginning of a new one. We are currently still living in a period of relatively low oil prices in our view, especially considering the collapse of oil prices in the first half of 2020 due to the coronavirus pandemic and lockdowns around the world. The sharp increase in the price of oil last year was caused not so much by market reasons as by geopolitical reasons,” says analyst Nataliya Milchakova.
However, a new cycle of oil market growth is not far off.
“The upward oil cycle could start as early as next year. If the IEA and OPEC forecasts come true and oil demand continues to outstrip supply, then the price of oil next year will return to $90-100 per barrel and more. Then in another four years, that is already in 2027-2028, a new cycle will begin: oil prices will be lower, as the market should “cool down”, and new technologies by the end of the decade may contribute for lower oil prices”, says Milchakova.
Meanwhile, OPEC+ production cuts, along with Russia, have apparently prevented oil from falling in price, keeping it at around $80-90 a barrel this year.
The US Department of Energy’s Energy Information Administration (EIA) in its latest report expects average Brent oil prices in 2023 to be $85 per barrel. This is an adequate forecast that reflects the decisions taken by OPEC + to reduce oil production in response to fears of reduced oil demand due to the banking crisis in the US and Europe, according to analyst Philip Muradyan.
For the exporters themselves, including Russia, higher prices are, of course, a boon. It is clear that the higher the price of Russian oil, the greater the revenues of the Russian state budget.
For the Saudis, the price is also important, although the production of Saudi oil does not require large expenses. According to Bloomberg, to finance imports and compensate for the outflow of funds in the form of remittances, prices of 50-55 dollars per barrel are sufficient for the kingdom. But to balance the budget, a much higher price is needed – 75-80. In reality, however, the Saudi authorities need more to invest billions of dollars in the development of their economy and justify the social contract with their citizens. For example, building a futuristic city in the Neom desert requires $500 billion in addition to outside investment. And these figures are not reflected in the budget. Therefore, to achieve all its goals, the kingdom needs oil on the order of $100 per barrel.
As for Russia, the share of oil and gas revenues in the budget, although decreasing, is still slow. In 2023, according to the plan, revenues in the oil and gas budget will amount to 8.94 trillion rubles, or 34% of all revenues in the budget. Therefore, these incomes are still important. The budget includes an oil price of $70 per barrel, which is lower than the actual price because it has to be sold at a discount.
Official figures from the Russian Ministry of Finance show a two-fold drop in oil and gas revenues (by 45%) in the first quarter. This is also explained by the decrease in export volumes due to the embargo and price ceiling introduced by the EU. Rerouting logistics flows takes time. In addition, world oil prices rose, while the discount for Russian “Ural” compared to the world price, on the contrary, decreased (from 33 to 29.5 dollars). Therefore, the decline in money is more significant than in tons. Both price movements are expected to continue in favor of Russian earnings.
It is clear that there are trends to improve both the volume of exports and the volume of export earnings. Because in March, according to the IEA, the export of Russian oil and oil products in tons reached the maximum level since April 2020. Sea supplies from Russia are growing both in terms of oil and oil products. And export earnings in March rose $1 billion from February to $12.7 billion. Thus, the minimum decline has been reached, after which a positive trend is expected.
The increase in oil prices will significantly improve the prices of the Russian grade “Ural” and partially correct the situation with the falling revenues of the federal budget, accumulated at the price of “Ural” of $70, agrees Philip Muradyan.
However, in 2023, Russia’s revenues from oil and gas may still be lower than in 2022 – by about 28%, Milchakova points out. But this is no longer a two-fold decline, as in the first quarter. This suggests that Russia has found new buyers in Asia to replace Europe, but it will not be possible to reverse the discount due to sanctions.
“Russian oil prices this year will either slightly exceed the budgeted oil price or even be lower.” This could lead to a more severe drop in oil and gas revenues and the overall budget. After all, the main source of income for the Russian budget is VAT and other types of taxes, but still the biggest taxpayers are exporters. If they earn less, the taxable base will decrease accordingly,” says Milchakova.
The deficit of the state budget of the Russian Federation in 2023 is planned in the amount of 2.9 trillion rubles. But if the average annual price of “Ural” oil is below 70 dollars per barrel, the deficit can be much larger, including reaching 4-5 trillion rubles, the expert says. And this can already have a negative impact on GDP, that is, instead of the predicted slight growth, there will be a decline, the ruble will continue to depreciate and inflation will grow, adds Milchakova. However, according to her, this is the most negative scenario, and in a more likely scenario, the increase in the price of oil could be much stronger than expected. “It seems that the oil market is still underestimating the effect of voluntary production cuts by Russia and the OPEC countries, but after some time, rather in one or two months, this effect will already be reflected in the market,” he suggests the source.
There is a risk point in rising oil prices that could hurt Russian revenues. This is the ceiling on the price of Russian oil, which was introduced by the West at 60 dollars per barrel. So far, the cost of selling Russian oil has naturally not exceeded this ceiling, and buyers have not been faced with the choice of whether or not to disrupt Western demand. But what will happen when the price of “Ural” is above the ceiling, what will the importers of Russian oil – India and China – choose?
In fact, this moment has already arrived – Russian oil is already starting to sell at a price above 60 dollars per barrel. “This will be a test of the effectiveness of the Russian oil price ceiling introduced by Western countries. Some participants in the infrastructure for the sale of Russian oil in friendly countries, that is, banks, ship owners, insurance companies, may refuse to serve such operations. The future will show whether they can be replaced”, says Muradyan.
Meanwhile, the government is already taking a number of measures to balance the budget and find additional sources of revenue to cover the budget holes. It helps the weakening of the ruble. The second is the gradual reduction of the discount for “Ural” compared to “Brent”, which started already in April. This will allow to attract more taxes to the budget from oil and gas companies in the form of profit tax and export duties. “Taxes have also been increased on a number of projects in the oil and gas industry, including LNG projects. At the end of the year, the budget will receive revenue from a tax on windfall profits – a one-time contribution from enterprises that earned more than 1 billion rubles in profit in 2022. The government plans to attract about 400 billion rubles, but there are already predictions that the revenue from this contribution will be more significant, about 450-470 billion rubles,” adds Milchakova.
Translation: V. Sergeev
Subscribe to our YouTube channel:
and for the channel or in Telegram:
#OPEC #alliance #helped #Russia #increase #income
