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What’s next for oil prices?
Despite the economic turmoil, oil prices have remained at historic high levels. During 2011, the average oil price reached an all-time high of USD 111 per barrel, and the outlook for the commodity is even brighter, with better-than-expected data from the US economy and the possibility of a new quantitative easing program in China.
“What’s so surprising is that the oil price has been stable despite the economic turmoil during the last six months. This was not the case during the financial crisis in 2008, when the oil price fell rapidly,” says Aivaras Abromavicius, partner and senior advisor at East Capital.
In the short term there are many reasons for higher oil prices.
“In 2009, we saw a huge rise in commodity prices as central banks started to print money in so called quantitative easing programs. This could again be the case in 2012. On Tuesday last week, China revealed new data that showed, for China, a relatively low growth rate. If China’s central bank starts with a new QE program it could be very positive for commodities, and above all for the oil price. All asset prices would inflate.“
Recent data from the US is also more supportive for the oil price compared with a few months ago.
“The likelihood of a recession in the US has decreased significantly and in the EU we are only talking about a short-term recession.”
Oil workers at Tatneft in action.
Another trigger for an even higher oil price would be a conflict with Iran.
“If Iran actually were to block the Strait of Hormuz, through which a large amount of all Middle East oil is transported, the oil price could easily go up to USD 150 – 200 per barrel. This is definitely not the base scenario, but it’s possible.”
The high oil prices are good news for Russia.
“Russia remains extremely reliant on high oil prices, especially in this election year, because of increased social spending. Also, Russia has started little by little to increase oil production. In 2012, the Russian oil production has reached an all-time high; Russia is now producing a little more than 10 million barrels of oil per day.”
Russian oil producers have advantages compared with oil companies in the West.
“Russia is not suffering from an oil reserves replacement problem like western oil majors are. For Russian oil companies there’s no problem replacing the oil they produce. Russian oil companies are now moving into Eastern Siberia. Until now, the largest production area has been Western Siberia."
"In terms of reserve replacement, Russian Oil companies on average have 20-25 year reserve lives, which implies there is no short-term necessity to look for new reserves immediately", says Aivaras Abromavicius.
