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As WTI Drops Under $90, Russia Prepares For Great Financial Crisis With $60 Oil "Stress Case"

The plunge in the price of crude oil in the last few months has many global-recovery-truthers questioning their assumptions. Between slowing growth expectations, US (and Libya and Iraqi Kurds and Russia) supply, and Saudi Aramco cutting prices (argued as maintaining market share but has the smell of a quid pro quo over Syria), oil prices have broken below $90 today to 17-month lows. However, for some major suppliers there is concern that more pressure is to come, as Reuters reports, Russia's central bank is working on measures to support the economy should oil prices fall by as much as a third or more, as First Deputy Governor Ksenia Yudayeva as saying the central bank was working on a "stress scenario" that was likely to envisage an oil price of $60 per barrel. Of course, as we noted previously, there is always the 'oil-head-fake' and as one analysts noted, "the main OPEC countries would experience budget difficulties long before that and would have to take action to cut supply."

 

There are numerous reasons for the drop in oil prices (as Ransquawk summarizes),

Overnight we saw Saudi Aramco cut official oil prices for Asian customers in November by more than expected despite oil price weakness and oversupply with traders seeing a  price-war for market share. Analysts at Commerzbank suggest that the OSP cuts gives a rise to doubt about OPEC's long-standing strategy of striving above all for price stability. [ZH: one can't help but wonder if this is some quid pro quo to the US - heading into elections, post-QE - in return for actions in Syria]

 

Excess supply emerging out of Libya has weighed over September, with the National-Oil-Company targeting 1mln bpd within the coming weeks.

 

Furthermore, OPEC have still held back from intervening either verbally or physically, signalling they are comfortable with the current fall in oil-prices. The next OPEC meeting occurs in November.

 

Elsewhere, Iraqi Kurds are to triple their oil output by the end of next year to 1mln bpd.

 

Of note, Russian supply has increased by 0.9% M/M in September and is thus providing further supply into the market.

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Some analysts have also pointed out that the continuation of global growth concerns will continue to weigh on oil prices.

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But, as Reuters reports, Russia is preparing for a further sharp drop in oil prices...

Russia's central bank is working on measures to support the economy should oil prices fall by as much as a third or more, a senior official said on Wednesday, showing growing concern as the rouble slides and Western sanctions take a toll.

 

Interfax news agency quoted First Deputy Governor Ksenia Yudayeva as saying the central bank was working on a "stress scenario" that was likely to envisage an oil price of $60 per barrel.

 

This would be added to three existing scenarios for the central bank's policy outlook for the next three years, and compares with a $100 assumption in the 2015-17 state budget adopted last week.

 

"The purpose of this scenario is to prepare a shock scenario to work out an action plan which we would implement to limit negative effects," Interfax quoted Yudayeva as telling a conference.

 

...

 

The central bank's current base scenario also assumes the oil price will recover above $100 per barrel for the next three years. Even then, it predicts only modest economic growth.

 

Commenting on the bank's new stress scenario, Finance Minister Anton Siluanov said that his ministry didn't plan to adjust its own projections used for budget planning, which he said factored in a possible oil price as low as $80 per barrel.

 

"The forecast of the central bank somewhat differs from that of the government. There is nothing terrible about the fact that they consider a wider range of possible changes in price parameters," he said.

 

...

 

Macro-Advisory analyst Chris Weafer said in a note that talk of emergency measures such as capital controls did not indicate any fundamental shift in policies. Such contingency planning was normal good business practice and "does not indicate that the central bank, or the Kremlin, has changed its position", he said.

 

Were oil to fall below $75 per barrel, the central bank could be inclined to back-track on its plans to float the rouble next year, he said, but added that this scenario was unlikely. "The main OPEC countries would experience budget difficulties long before that and would have to take action to cut supply," he said.

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Finally, do not forget the oil head-fake...