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Who "will break" falling oil?
Material posted: Publication date: 17-10-2014

Oil prices continue to fall and this puts immense pressure on producing countries around the world. But if some just will face certain difficulties, for others the continuation of the current trend threatens to collapse.

Saudi Arabia seeks to maintain its market share, so willing to tolerate low prices for some time. Kuwait also stated that he would be willing to reduce prices to maintain its production levels unchanged.

However, the reduction in the cost of "black gold" has placed pressure on all producers, including Saudi Arabia, but Riyadh is hoping that the negative economic impacts will mainly be borne by the competitors.

Low prices need only several countries: Qatar, Kuwait, Angola, UAE and Saudi Arabia. For all other members of the OPEC oil is expected to cost over $100 per barrel, otherwise they will not be able to balance their budgets.

The list of competitors includes US companies operating in shale deposits, because they have high average costs of production.

If we consider a specific field, six the most expensive are located in the oil Sands of Alberta. For example, the project Foster Creek ConocoPhillips heads the list with a score break-even at the price of $159 per barrel.

According to the International energy Agency, 2.8% of the total world oil production could become unprofitable if prices fall below $80 per barrel. Canadian oil Sands will top the list of loss-making projects, but shale projects the U.S. will not be much behind.

Venezuelan economy and oil

But, apparently, the most vulnerable country right now is Venezuela. As a member of OPEC Venezuela says about the need to reduce oil production, and calls for an emergency meeting of the cartel. The fall in oil prices is causing great anxiety in Caracas.

Thanks to the revenues of the state oil company PDVSA, the Venezuela government could increase social spending in the last decade, which was a key objective of Hugo Chavez and his successor Nicolas Maduro.

However, the use of oil revenues for a wide range of spending priorities has led to the fact that the PDVSA did not have enough money for necessary investments to increase oil production, not to mention the maintenance indicator at the current level. As a result, since 2000, production in the country has fallen from 3.5 million bpd to 2.5 million bpd.

For Venezuela's economy oil prices around $100 – is negative. All because oil revenues make up 97% of all foreign exchange earnings of the country, and to balance the necessary the price of $120.

Last year the country earned on oil to around $86 billion But the price of hydrocarbons is rapidly falling, and the budget deficit reached 17% of GDP.

Now Venezuela is in economic crisis. Annual inflation exceeds 60%, the economy for the first six months declined by 5%. In the country there is a shortage of food, medicines and other goods, and the authorities in the summer even suggested that the plan for sale in stores the fingerprint.

Crime has increased greatly, including the capital, and people are afraid to go out at night. Many are trying just to leave the country.

In addition, the government has accumulated a large debt, and Venezuela's bonds are among the riskiest in the world, the yields already exceed 16%. Only this year to service external debt will need $7 billion and at least $10 billion annually in the next three years.

Venezuela's reserves are barely above $20 billion, less than $2 billion accounted for foreign currency.

Credit-default swaps (CDS) on Venezuela's bonds have soared 80% over the past two months, making bonds the most risky countries in the world.

For Venezuela, the price of CDS has reached 1857 points. At the current price of CDS to insure against non-payment on bonds worth $10 million the investor should within five years to pay $1,857 million annually.

The rating Agency Standard & Poor's believes that the probability of default over the next two years is 50%. A sharp devaluation can help Venezuela to close the gap in current account balances, but only at the expense of high inflation. This idea is also not really like politicians, especially ahead of the parliamentary elections. The default, according to many economists, this looks like the best solution to this situation.

With high probability, the crisis in Venezuela will only intensify now, as the cost reductions, including social, is not planned.

The Maduro government is desperate for high prices, but Saudi Arabia stands his ground. The OPEC meeting will only happen on 27 November, and for Venezuela, these few weeks can be an eternity.

How low oil prices will affect Russia

About half of Russia's budget falls on oil and gas revenues, so any drop in prices can have its consequences. In recent years, the Russian economy became more dependent on oil exports. In 2013, non-oil budget deficit reached 10.3% of GDP, and this is the highest level in the last three years.

By reducing oil prices by $1 Russia loses $2.1 billion of budget revenues a year. Due to the fall in prices in recent months, the revenues may decrease by $30-40 billion.

Russia's economy this year, according to estimates by the MAYOR, will grow by 0.5% or more. Economists surveyed by Bloomberg expect GDP growth at 0.4% in 2014 and 1% in 2015, While they note that Russia is faced with risks of recession starts.

In early October, oil prices fell to $92 per barrel. This level does not imply economic crisis, but for balancing the budget required a cost of $105.

The Russian budget for 2015 converted at the rate of $96 per barrel of Urals oil, and the expected price for the MAYOR assumes the level of $100.

Nevertheless, even the predicted price level now suggests the possibility of weakening of the ruble, preserving a relatively high level of inflation and the potential use of reserve funds to Finance the budget.

As a result, if oil prices will continue to decline in the coming months, the economic situation may deteriorate. The Bank of Russia does not exclude that will include the crisis scenario of falling oil prices in the draft monetary policy (DCT).

It can be assumed the price drop to $60 per barrel and a sharp weakening of the ruble, which may result in the need for additional action by the Central Bank. The regulator notes that if formed a long-term declining trend in oil prices, the slowdown of the domestic economy will be of a structural nature.

Also do not forget that Russia is gradually reducing its dependence on exports of "black gold". Thus, the share of oil and gas revenues in total budget revenues in 2015 will amount to 51%, and by 2017 will drop to 49.6%.


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