Oil: a strong dollar hits prices. Not everything is so bad with the Belarusian ruble. Opinion of Valery Polkhovsky Fed discount rate
Prices for oil of the main standard grades showed the most rapid growth in 2016 after OPEC countries agreed on production cuts at a regular meeting in Vienna. Valery Polkhovsky, an analyst at FOREX CLUB Group, writes about this.
Contracts for European Brent oil with an expiration date in February on the ICE exchange in London on November 21 at 11.00 Moscow time added 0.9% to $51.90 per barrel. At the same time, the American WTI standard rose by 0.9% to 49.40. A day earlier, both varieties increased in price by about 8%.
On November 30 in Vienna, OPEC countries agreed to reduce oil production from January 2017 according to the agreements announced on September 28 in Algeria. Since the beginning of 2017, the cartel will reduce production by a total of 1.2 million barrels, and expects non-OPEC countries to reduce production by 600 thousand barrels per day. Reduction quotas do not apply to Nigeria and Libya, and Iran will freeze production at 3.7 million barrels per day.
OPEC was able to overcome all key differences, confounding skeptics and signaling that the cartel is far more alive than dead. His return to the market as a regulator signals the end of the “download as much as you can” policy and will help quickly balance supply and demand. If it is possible to achieve a reduction of 1.8 million barrels per day, taking into account the obligations of non-OPEC countries, this will help the market quickly get rid of excess reserves and raise the price to the level of 50-60 dollars.
It is also worth noting that OPEC’s decision to reduce will remain in effect until mid-2017. At first glance, this seems to be a weak point, but this is not the case at all. By setting quotas for only 6 months, the cartel avoids rising prices at the far end of the forward curve, which would prevent high-cost miners from using long-distance contracts to hedge risks. If necessary, the decision on reduction can be extended in June.
Skeptics will now point out that non-OPEC countries may not cut production. However, it is worth noting that in countries such as Mexico and Azerbaijan, production will drop naturally due to the depletion of deposits. If Russia fails to achieve a production reduction, which is expected to be about 300 thousand barrels, then in general this will not make fundamental changes to the plan.
“We believe that the OPEC move creates a new, higher, fundamentally sound corridor for price fluctuations. According to our preliminary estimates, its central value will be in the area of $55 per barrel. Towards the end of 2017, it may move to the level of $60,” concluded Valery Polkhovsky.
How recent world events can affect the exchange rate of the Belarusian ruble - senior analyst of Forex Club Group Valery Polkhovsky shares his opinion.
Russian Sberbank issued a forecast in which the Russian ruble is expected to fall further. Next, according to the forecasters, the Belarusian currency should weaken.
Among the risk factors for the Russian and Belarusian currencies: the falling price of oil due to the lifting of sanctions on Iran, the bursting of the stock bubble in China, and an increase in the discount rate by the US Federal Reserve.
Senior analyst of Forex Club Group Valery Polkhovsky in the commentary “About business.” assessed the level of possible influence of these factors on the Belarusian ruble.
Valery Polkhovsky
Lifting sanctions on Iran
Some believe that lifting sanctions on Iran will lead to an increase in oil supply. This will bring down prices for it and, consequently, the Russian ruble, followed by the Belarusian one.
Indeed, Iran has the third largest oil reserves in the world. But he was under sanctions for more than one year. The state of its oil industry is deplorable. Oil production is not just about covering a well with polyethylene when it is not needed, and then lifting the film and starting pumping.
Iran will need investment in the industry: equipment upgrades to reach pre-sanction levels. This will take two years.
Besides, I don’t think the sanctions will be lifted quickly. For example, a UN mission will go there in December to see how the country is implementing the agreements. And if something goes wrong, the sanctions will be returned.
Thomson Reuters several weeks ago surveyed professional oil traders about their expectations for Iran's entry into the oil market. 80% of respondents believe that by the end of the year Iran will be able to offer a maximum of 500 thousand barrels per day. Many are confident that Iran is unlikely to be able to produce more than 250 thousand. For reference: the world economy consumes 93 million barrels per day. So this is a small amount.
In a year, shale oil production in the United States will fall by at least 1 million barrels. The number of operating drilling rigs there is already being reduced by 50%. So even if Iran covers this volume, nothing on the market will change globally. Prices are likely to be fixed at $50-70 per barrel for several years. The average annual price will be around $60, which corresponds to a USD/RUB exchange rate of 55-60.
Fed discount rate
Many experts expect the dollar to strengthen due to the fact that the US Federal Reserve is going to raise interest rates. This strengthening will automatically weaken the Russian and Belarusian currencies.
For many, this increase is perceived as the end of the world. But where is the stake now? At the level of 0.25%. The Fed has stated that it will not raise it sharply (members of the US Federal Reserve Committee believe that the optimal rate at the end of the year will be 0.625%). At best, it will be moved by 0.25% at each Fed meeting.
There are 8 meetings per year. This is a maximum of 2% for a full year. So this year the growth will be no more than 0.5-0.75%. Even if you imagine that it turns out to be 2.25%, this is still a very low rate.
Practice shows that the American economy begins to slow down when the discount rate reaches 4%. There is still a long way to go to reach this level.
Despite the rate hike in the United States, a number of world countries are easing interest rate policies: Japan, China, the Eurozone. So we will see some strengthening of the dollar, it may put pressure on the Russian ruble. But the pressure will not be strong.
The dollar may strengthen against the euro due to intra-European problems.
China's stock bubble burst
In the US, companies finance 80% of their needs through stock markets. In Europe - 20%, in China about the same level. So the damage from the bursting bubble is not so large-scale. I would not say that it will lead to financial starvation.
In addition, the People's Bank of China is already implementing incentive programs. Injects liquidity into the country's financial system.
Therefore, there is a problem, but it is not global.
What awaits the Belarusian ruble by the end of the year?
Now the dependence between the Russian and Belarusian rubles is clearly visible. If the Russian ruble weakens, then most likely the Belarusian ruble will too.
I believe that the exchange rate of the Belarusian ruble to the Russian ruble at the level of 300 rubles is equilibrium. Businesses need to ensure that the RUB/BYR ratio is 270-300. If the corridor begins to change, this will indicate an approaching imbalance.
As for the exchange rate of the Belarusian ruble against the US dollar, I believe that by the end of the year the national currency may weaken by 1,500 rubles. Volatility can be 500-700 rubles.
There are no prerequisites for a sharp fluctuation yet:
1. As I already noted, oil prices have already stabilized at $55-65 per barrel. This corresponds to a rate of USD/RUB55-61. And he is already in this corridor.
2. Payments to Belarus on external debts will most likely be made with the help of Russian loans.
As for the exchange rate jumps in recent days (the ruble has been strengthening over the past few days - approx. "About business."), then this can be explained by the actions of the National Bank. It expands the range of fluctuations to discourage speculators from playing against the national currency.
Prices for major benchmark crude oils are under pressure as the US dollar strengthens across the global market and US shale companies continue to add more rigs.
Based on the results of the previous week, oil service company Baker Hughes recorded an increase in the number of operating drilling rigs in the United States by 7 units, to 414 units.
The US dollar experienced a large-scale increase across the entire foreign exchange market as Fed officials expressed doubts about the effectiveness of further continuation of loose monetary policy.
Prices have been very volatile lately and this is not surprising. The market cannot yet trade confidently with Brent prices above $50 per barrel. This requires strong fundamental prerequisites, but they are still lacking. On Thursday we saw good stock data. But already on Friday, the dollar began to strengthen throughout the foreign exchange market and due to comments from Fed representatives, and this is always negative for oil.
This week prices are unlikely to receive additional support from any quarter. This is the last week before the Fed meeting, and the dollar will feel confident. At the same time, the significant drop in inventories that was recorded last week was most likely one-time in nature. Still, now is not the season for their sustainable decline.
Accordingly, the fluctuation range of $47-52 per barrel remains quite logical. If the dollar continues to actively strengthen, then Brent may drop to 45, but this will already be interesting for purchases.
In contact with
In the “Opinions” section of the website of the PRIME Economic Information Agency, materials provided by analysts, traders and experts of Russian and foreign companies and banks are published, as well as the opinions of the PRIME Agency’s own experts. The opinions of the authors on a particular issue reflected in the materials published by the Agency may not coincide with the opinion of the editors of AEI "PRIME". More details
The opinions presented are expressed taking into account the situation at the time of publication of the material and are for informational purposes only; they do not constitute an offer or advice to undertake any actions and/or transactions, including the purchase or sale of securities. For all questions about posting information in the "Opinions" section, you can contact the agency's editorial office: .
