Category Archives: Oil prices

20/12/15: Of those Russian GDP 2016 forecasts

In my recent column for (see: I quipped that in the case of the Russian economy, forecasts for 2016 growth rates might just as well be taken from the fortune tellers, as there are too many moving factors driving the economy, all of which are virtually impossible to forecast.

Now, h/t to @JoMichell, we have a picture of 'predictability' of one key driver of the Russian economy - oil prices. Please, keep in mind: these are Brent prices (Urals grade predictability is even lower, as Urals-Brent spread is subject to further uncertainty, including geopolitical risks and substitution risks, as discussed in my column).

So here is a chart showing IMF forecasts for Brent prices issued back in June 2015:
 Note that in the above, least probable downside scenario is for oil above USD40 per barrel through 2015. Alas, the least probable forecast is not exactly the lower bound for reality:

So here we have it: less than 6 months forecast out, and the least probable worst case scenario has been breached already. Good luck pinning Russian GDP forecasts down...

10/10/15: What, When, If the $7 trillion SWFs Gorilla Moves?

Remember this bit about Central Banks' reserves taking a dip globally? And now consider this, about Sovereign Wealth Funds shrinking their income/assets. The alarmism is premature, as the article explain, since SWFs are (1) big, (2) likely to see return to inflows of funds once oil and broader commodities prices recover, and (3) longer-term investment vehicles with broad mandates. Which implies there is not so much panic looming from SWFs downsizing their holdings (selling assets).

But the key is in the second order effects: as long as oil prices remain low, SWFs are not going to be active buyers of assets in the near term (so demand base for assets is taking a knock down, currently being obscured by the Central Banks' demand in some areas - e.g. Euro area, and/or by leveraged plays and carry trades still available on foot of Central Banks (more limited) adventurism. Which means that any 'normalisation' in monetary policies today is likely to coincide with a period of subdued demand from the SWFs for assets. And that is pesky enough of a problem to worry anyone in the markets.

Beyond this concern, note two other problems arising from the current oil price slump:

  1. SWFs, having parked their buying for now, are becoming less predictable per strategy they might take when prices do recover (the longer the period of oil prices slump, the higher is uncertainty); and
  2. How the future balancing between liquidity risk and returns going to play across the SWFs strategy (again, the longer the period of low oil prices, the more likely exit from the oil price slump will entail SWFs pursuing less risk-loaded assets and opting for greater safety - a sort of precautionary savings motive for the SWFs).

15/6/15: Long Run Oil Price Chart

Quite a wonkishly fascinating chart (I love long time series, even if much of them are imaginary numbers): via we have oil prices from 1860s on, though, sadly, not updated to most current, which is just around 1970s decade average.

Draw conclusions at your own peril. I chance to say: post 1900 price trend is all steady, until Governments mess up (the 1970s crisis - Governments-led, the 2000s lift-off - also Governments-led). So here you have it... boring commodity that is occasionally over-politicised into a bizarre beast.

10/4/15:Ruble’s Mysterious Rise: Some Thoughts

There is an interesting debate starting up around the Ruble: in recent weeks, Ruble appreciation against the USD has pushed it out of its traditional long term alignment with oil prices, as noted in the chart below:

Source: @Schuldensuehner 

There are several possible factor that can account for this.

  1. Oil price expectations - if the markets expect oil prices to rise further, Ruble buyers can bid the currency up ahead of the oil price changes. This is unlikely in my view, as we are not seeing oil price firming significantly in both spot and futures markets.
  2. Oil price revelation - if the markets priced in severe forecasts uncertainty linked to oil price dynamics to the Russian economy back in October-December 2014, then the new information about Russian economy's performance in Q1 2015 should lead to re-pricing of risks. In my opinion, Ruble was heavily oversold in December (not in october-November) and there is some upside potential, given that the Q1 2015 data coming out of the Russian economy is not as apocalyptic as some currency markets analysts expected. Notably, there has been a significant cut in USD long positions vis-a-vis Ruble in recent days, which signals speculative re-alignment toward long-Ruble.
  3. Demand Factor 1 - March is the end of Q1, so it is the month of rising demand for Ruble to cover corporate tax liabilities (Russian corporates pay taxes in Rubles). VAT receipts are also coming due. And estimated forward taxes and charges. In my opinion, this helps to temporarily boost Ruble valuations.
  4. Demand Factor 2 - March is the last month before major companies in Russia are due to reverse their forex holdings to October 2014 levels (per December agreement hammered out by President Putin). This means increased supply of USD and other currencies, and increased demand for Rubles. Again, a temporary factor, in my opinion.
  5. Supply Factor - March and April are also large months for corporates to book in energy-related exports earnings. Note that Russian Central Bank is recording a small rise in reserves in late March, followed by a decline in April.
  6. Demand Factor 3 - March also was the month of largest (for 2015) external debt redemptions by Russian banks and corporates. Repayment of these debts involves buying dollars and selling Rubles, but timing-wise, companies have been pre-building their forex reserves for some time, so it is most likely that in recent 3 weeks there has been less demand for dollars (and other forex) than in previous 2 months. Note, I covered this here:
  7. Demand factor 4 - since the start of 2014, Russia actively pursued reduction of the degree of dollarisation in its economy. The first stage of this process involved increasing trade settlements in other currencies (most recent one - announced this week - with Indonesia). This, alongside with imports collapse, reduced external trade-linked demand for dollars. The second phase of de-dollarisation started in February, when Russian retail deposits started exiting dollars and shifting back into Ruble on improved confidence in the banks and high deposit rates. Again - a temporary support for the Ruble.
  8. Demand factor 5 - as Russian CDS show, probability of default declines for Russia sustained in recent weeks implies improved demand for Russian Government (and local) bonds, issued in Ruble markets. The result is improved demand for OFZs and, thus, for Ruble. 
  9. Real vs Nominal exchange Rates - inflation dynamics in Russia are most likely drawing a gap between real and nominal exchange rates, so nominal rate firming up is not imposing equivalent increase in the real rates. 

In other words, we have many, many moving parts to one equation. One can't tell the dominant one, or which are likely to last longer, but my sense is that majority of these forces are temporary and the long-run link between Ruble and oil price will be regained.

Now, assuming oil price dynamics remain where they are today (weak upside), Ruble is likely to devalue again, back to USD/RUB 55-57 range. If inflation does not fall toward 10% in Q2 2015 (and I do not think it will), we are likely to see Ruble move into USD/RUB 60-65 range over this quarter. On the other hand, improved outlook for the economy (signalling, say annual contraction closer to 3.5-4 percent) can see Ruble staying within the USD/RUB 50-53 range.

One thing is for sure: so far, the Central Bank of Russia has managed damn well its dance in a very tight monetary policy corner between runaway inflation, prohibitively high interest rates and a massive squeeze on forex valuations. How long this 'smart game' in multidimensional and highly dynamic chess can go on is everyone's guess.