Oil price to reach $40, but dollar not to reach 70 rubles

Oil price to reach $40, but dollar not to reach 70 rubles

Russia’s Finance Ministry expects that the oil price will drop to $40 per barrel after the oil production reduction agreement between OPEC and non-OPEC oil producers expires, Russia's Deputy Finance Minister Vladimir Kolychev said.

"It is logical to expect that the equilibrium oil price is still lower than the current one. Once the deal is implemented, the price will actually approach it. We think that it will be around $40 per barrel," TASS cited the deputy minister as saying.

According to him, the reduction of the price to such a level will happen after the expiration of the agreement, in the first quarter of 2018.

He also  noted that Russia’s Finance Ministry states a gradual decrease in the dependence of the ruble exchange rate on oil prices. "If we look at the dependence of the dynamics of the exchange rate and the dynamics of oil prices since February, when we started these operations (purchases of foreign currency), we see that the correlation has strongly changed and decreased," Kolychev said.

"This is a slow process, but we are approaching this goal," the deputy minister added.

Advisor on macroeconomics to the CEO of the 'Opening-Broker' brokerage house, economist Sergey Hestanov, speaking to Vestnik Kavkaza, in the first place noted that the Finance Ministry, when predicting a decline in oil prices to $40 per barrel, proceeds from the premise that sooner or later the oil production reduction agreement between OPEC and non-OPEC oil producers may be violated.

At the same time, he recalled the similar OPEC deal concluded during the 2008 financial crisis. "It showed that unfortunately, such agreement are not sustainable, because after some time there were countries willing to break this agreement, so once the violations became massive, the deal was canceled. If one of the countries starts increasing its quotas, all the others will respond in kind," the expert explained, adding that it is difficult to predict when it will happen, since everything depends not only on economic, but also a political factors.

"As experience shows, most price cartels of this type do break up. And $40 per barrel is an estimate of the cost price of shale producers. That is, if oil prices decline below $40 per barrel, shale oil producers will start cutting production. Conversely, if the prices rise, they start to increase output. So the price of $40 per barrel looks good enough," the economist said.

Speaking about the ruble exchange rate, he said that most likely, if oil prices decline closer to $40 per barrel, then we will see the rate somewhere around 64-69 rubles per dollar.

In addition, he noted that the dependence of the ruble exchange rate on oil prices is still quite strong. "In recent years, the ruble is less dependent on oil, but through the filling of the federal budget this link is strong enough. Therefore, if oil price declines and remains low long enough, then the ruble will inevitably decline. To ensure that the ruble is resistant to fluctuations in oil prices for a long time, Russia's economic structure should change greatly, but it will take about 15 years," the advisor on macroeconomics to the CEO of the 'Opening-Broker' brokerage house said.

He also noted that the partial reduction in the dependence of the ruble exchange rate on oil prices is directly related to oil prices. "This is a rather natural process: the more oil costs, the greater ruble's dependence on oil is and vice versa," the economist explained.

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