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“Lower for longer” is becoming the catch phrase of the global oil industry, as an increasing number of energy executives and government officials alike see no opportunity for prices to rebound to their levels of mid-2014.
The latest such forecast came from Maxim Oreshkin, Russia’s deputy finance minister, who says he expects oil to sell for no more than $40 to $60 per barrel for the next seven years, and that Moscow is adjusting its budget planning accordingly, given that half the country’s annual budget relies on revenues from oil and gas sales.
“In our estimates, one should hardly expect any serious growth of the oil price above $50,” Oreshkin told a breakfast forum hosted by Russian newspaper Vedomosti on Friday. “The oil industry is changing structurally and it may happen that … the global economy will not need that much oil.
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“Therefore we see a range from $40 to $60 somewhere for the next seven years,” Oreshkin said. “And these are the prices we should base our macroeconomic policy on.” They also must take into account the pressure on Russia’s economy brought by Western sanctions imposed because of Moscow’s annexation of Ukraine’s Crimean peninsula and its role in the country’s internal conflict.
The Finance Ministry’s first step, he said, will be to address an expected deficit of 3 percent for the country’s 2016 fiscal year because his ministry forecasts that the average global price of oil will remain where it has been for the past few months, between $40 and $50 per barrel. In fact, the world’s two international benchmarks, Brent crude and West Texas Intermediate, recently dipped below $40.
Specifically, Oreshkin said his country’s deficit forecast for fiscal 2016 is $21.7 billion if the price of oil remains around $40 per barrel for the next year. Revenues are expected to be $204 billion in 2016, compared with $238 billion in projected spending, he said.
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The low cost of fossil fuels, including gas and coal, may be a boon to consumers and businesses who still rely on such energy, but they’re devastating not only to oil companies but also to countries, including Russia, who rely on oil to balance their budgets.
And the blame for this appears to rest solidly with OPEC, which is commonly called a cartel, according to the International Energy Agency (IEA). Cartels exist in large part to regulate prices, but for the past year the group decided not to reduce its collective production ceiling below 30 million barrels per day despite an oil glut. The aim was to keep prices low long enough to drive producers relying on expensive extraction methods out of business.
OPEC has twice reaffirmed that policy, most recently at its Dec. 4 ministerial meeting in Vienna. And in its monthly Oil Market Report issued the very day Oreshkin spoke, the IEA, which advises its 29 member states on energy policy, implied that “cartel” doesn’t apply to OPEC now because the group’s members have been exceeding the ceiling for months.
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“The exporter group has effectively been pumping at will since Saudi Arabia convinced fellow members a year ago to refrain from supply cuts and defend market share against a relentless rise in non-OPEC supply,” the IEA report said. Its decision to maintain and even exceed its own production ceiling “appears to signal a renewed determination to maximize low-cost OPEC supply and drive out high-cost non-OPEC production – regardless of price.”
Some OPEC members such as Venezuela that are not as wealthy as OPEC’s Gulf States have expressed their concerns about the strategy. And even the group’s Secretary General Abdallah Salem el-Badri has expressed hope that oil producers outside his group will work with him to establish more realistic combined production levels.
“We are looking for negotiations with non-OPEC [producers] and trying to reach a collective effort,” he said last week. He reported some “positive” overtures from such countries, but no concrete proposals. “Everybody is trying to digest how they can do it,” he said.
Until such an agreement can be reached, it appears that Russia will spend the next several years trying to dig itself out of a deep financial hole.
By Andy Tully of Oilprice.com
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Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com