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As I discussed recently (Why the Saudis Are Cutting Oil Prices), Saudi Arabia has made headlines by cutting oil prices, not production.
It seems the Saudis are more interested in grabbing market share than in attending to the present state of the market.
That move seems calculated to undercut the effect the United States has on global oil markets, even though that effect is indirect.
But make no mistake: Russia is the country that will suffer the most as oil prices drop.
Thanks to the Saudis, this could get ugly very quickly for Putin…
Growing Supplies and Falling Prices Hurt Russia the Most
Up until now, Russia was in a strong position, with the ruble trading at more than 41 to the dollar, an all-time high.
But what's propping that price up is oil. You see, 60% of Moscow's central budget is dependent on the international sale of oil and natural gas.
And the 2015 budget projections from the Kremlin are based on oil at $90 to $95 per barrel.
With the current price (West Texas Intermediate) around $82, and dipping below $80 intraday, that budget collapses.
How Low Can Oil Prices Go?
There's a lot of jawboning going on these days about how far oil prices will fall before a floor forms. Not too long ago, we were having a similar conversation on the expectation that prices would be moving higher.
How quickly things change.
The essential fallacy in all of this is the patently false assumption in the background. Most projections assume that whatever movement is taking place now will continue into the future.
Oil went up last week? Then it will go up again this week. And the week after. That's the fallacy.
Retail investors can't think like that. They need to take the long view. It's the flash boys that gyrate stock and commodity prices in the short-term to wrestle marginal profit.
And what is happening currently with oil prices has nothing to do with the long term.
In fact, these days the average investor in energy prospers by setting up a strategy with specific companies, not by following broad sector trends and daily gyrations.
However, one traditional consideration has resurfaced as a result of the current extreme volatility.
Focusing on the staple supply/demand connection is back. But in the case of oil, it has a decidedly geopolitical look about it.
It's the supply side of this equation that's driving prices right now. Here's why.
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.
US$90 per barrel x 35 RuR per US$ = 3,150 RuR per barrel. US$80 per barrel x 40 RuR per US$ = 3,200 RuR per barrel. 3,200 RuR – 3,150 = + 50 RuR per barrel. Therefore, Russia is the country that will suffer the least as oil prices drop. Putin laughing in your face. The Saudis are going to whip themselves to half-dead before they ever really hurt Putin, if you are so happy about them hurting him. You (the USA) are very expert in stirring up some strife on others' expense, but this time again you hurt your… Read more »
I have to agree with Vlad, but I disagree that the Saudis are getting "hurt" over this oil drop. They have a 40% stake in Molten Salts Solar project in Spain. When that technology (which is pretty simple scientifically), they will build them around the world. I would think that a big time market correction in crude oil is on the horizon. Germany has a 300 mpg car in production, and it's a game changer. It will be hard for Americans to be silent much longer with the silent inflation for food (and other things that are not tied to… Read more »
Vlad, while your explanation results in more Rubles in the domestic economy, it does it through the devaluation of the currency. Would it be even better to devalue the Ruble to 100 to the dollar? The man on the street in Russia would find any imported goods very expensive. I visited St. Petersburg in 2002, Loved it and the Russian people. Putin's escapades are not good for them in the short to intermediate term. Though I believe he's willing to accept that to get the long term benefit that he sees in taking the Crimea back. Attacking Ukraine not so… Read more »