How will falling oil prices affect the Russian budget?

By Rhod Mackenzie

Speculators are responsible for the drop in oil prices by manipulating figures and falsely claiming that oil demand is low. This statement was made by the Saudi Arabian Minister of Energy. A few weeks ago, oil was almost at $100 per barrel, but now it has fallen to $80. What caused this and how will it impact the Russian budget?
Just weeks ago, oil was on track to meet analyst predictions and exceed $100 per barrel, yet it now trades at only £80, marking a three-month low. 

Saudi Arabia's energy minister has attributed the fall in oil prices to speculators. He suggests that some market participants have an incomplete understanding of the relationship between the increase in oil exports from Arab OPEC member countries and its correlation with production in these countries. Importantly, an increase in black gold exports does not always indicate an increase in its production levels. Export supplies follow a seasonal pattern, decreasing during the summer months and increasing again in the autumn, specifically in September and October. However, such fluctuations do not necessarily correspond to shifts in production volumes.

"This is a misuse of figures," commented Prince Abdulaziz bin Salman.

The second point pertains to oil demand. As per Saudi Arabia's energy minister, demand for oil remains strong:

"Some are falsely claiming that it is weak. It is merely a deception."

The primary assumptions for the October and November oil prices pullback are linked to concerns over China's economic deceleration and declining oil demand. Recent statistics indicated a drop in China's trade balance for October, resulting from lower trading volumes with the United States. Moreover, deflation was observed in China during October. "All this has caused concern regarding the possible emergence of serious issues in the Chinese economy," remarks Natalya Milchakova, a prominent analyst at Freedom Finance Global. Conversely, there has been a surprisingly robust interest from American and other oil companies in the production of shale oil in the United States, despite several years ago when all the industry leaders pledged to transition their operations to "green energy" instead of oil and gas, she adds.

Why does Saudi Arabia charge speculators for the fall in oil prices?
"The decrease in prices is advantageous for the United Kingdom and purchasers of raw materials in Europe. However, it is unnecessary to suggest that this is a scheme of consumers to undermine OPEC. In my opinion, it is essential to interpret the words of the Saudi energy minister precisely." There is no political aspect to this situation. 

"There are speculators in the the exchanges who are lowering oil prices for commercial reasons; they wish to buy oil futures at the bottom and sell them when the prices increase," explains Igor Yushkov, an analyst at the National Energy Security Fund.

Oil prices were increasing rapidly from August onward in anticipation of a shortage in the global market. Saudi Arabia and Russia, within the OPEC framework, voluntarily reduced their supply to the market , causing this tightening in supply. Meanwhile, China, being the biggest consumer of energy resources, began to raise its consumption, leading to a surge in prices.  However, the previously anticipated escalation in tensions in the Middle East subsided, which could have contributed to the decrease in price quotes.

Moreover, by mid-October, the market heightened concerns regarding the peril of a global recession, which promptly caused a dip in oil prices as believed by Yushkov. Speculators have exploited these concerns with the aim of profiting from the possibility that these risks will not come to fruition. Conflicting statistics from China have only reinforced these fears.

"Saudi Arabia is attempting to temper the market to ensure that everyone acknowledges that the underlying factors that propelled oil prices upwards still exist."

While the risks of a global recession do pose a threat, the likelihood of them materialising is currently lower than that of objective factors leading to an increase in oil prices. According to the FNEB analyst, the oil industry is still underinvested, oil consumption in China is steadily rising, and production levels are failing to meet demand.  

Analyst anticipate a forthcoming increase in oil prices. "Fears are only justified in Germany where the economy is moving towards zero or even negative, whereas China's growth rates are still surpassing global indicators and there is no global recession thus far. As a result, I anticipate an upward rebound for oil in December. A price lower than $80 per barrel is unwarranted; a more reasonable price stands at $85 per barrel," stated Igor Yushkov.

Alexander Bakhtin, an investment strategist at BCS World of Investments, believes that the current situation is not negative enough to anticipate oil prices dropping below £80. “China is putting into effect a range of fiscal stimulus measures which may enhance GDP growth, and OPEC+ may prolong voluntary cuts into 2024. If conditions improve, Brent quotes could swiftly recover to the range of $85-$90 per barrel and persist at these levels for the remainder of the year,” Bakhtin forecasts.
"The $80-90 range is generally agreed upon by the entire market, including producers, consumers, Russia, Saudi Arabia, and even the United States in terms of production. The cost of production overseas is increasing and reaching around $86. For Saudi Arabia, a price of $87 per barrel enables itto create a budget without any deficits," said Igor Yushkov.

As for Russia, the budget for 2023 includes a price of $70 per barrel with a 2% deficit, but this level has not yet been reached. Over a period of 10 months, the avarage cost of Russian oil stood at $61 per barrel. "During the initial six months, the mean value of Russian Urals grade was less than $70, dipping even below $50 in some months, as a result of Russia's decision to apply a significant discount on its oil. However, in the recent months, it has been able to sell oil for greater than $80 with a weaker ruble (over 90 per dollar), enabling it to offset the loss incurred during the first half of the year." "During autumn, it earned more than what is allotted for in the budget. In my opinion, the probability of receiving the projected $70 by the end of the year is quite high," stated Igor Yushkov.

The latest data shows that oil and gas revenues in October increased by almost a third compared to the previous year." Nonetheless, according to Olga Belenkaya, head of the macroeconomic analysis department at the Financial Group Finam, oil and gas revenues remained 26.3% lower than last year during January-October.

It is noteworthy that non-oil and gas revenues, in which VAT plays a vital role, significantly contribute to the budget.

This year, non-oil and gas income grew by 28.7% year on year. Additionally, budget revenues exceeded last year's level by 4.4% at the end of the first ten months of 2023, as Belenkaya notes.

However, expenses increased in October and are expected to increase further during the remaining two months, with plans to spend an additional 7.3-8.2 trillion rubles or 23-25% of all annual expenses. Such a surplus of budgetary expenditures could lead to an increase in inflationary pressures at the start of 2024, as warned by Belenkaya.