The price of Russian crude oil – Urals MED blend – in Europe fell to unprecedented levels since the financial meltdown in 2008, at a stock market crash registered a record 31 percent drop. The analogy goes even further deeper and back to 1991 – the war in The Persian Gulf.
The global oil market continues its ‘free fall’ against a backdrop of a rapid spread of the coronavirus outside China and Russia’s refusal to support the OPEC + production restriction agreement.
Prices for major crude oil benchmarks have been falling for weeks. Here is the price chart for the Brent reference mark for the Urals Med today – March 9th.
Trading on the Asian stock exchanges led to levels just over $ 31 a barrel, while during the day, with the resumption of trade in the stock and commodity exchanges in Europe and later in the US, there was a slight rebound. The trend is downward, as futures for May are below quotes for the day. The market is bearish, investors and traders do not believe that a stable bottom has been reached and expect further price dips.
Vladimir Putin has decided to play “va banque” and is prepared to lose $ 300 million a day, to deal a mortal blow to the US shale industry and take it out of the global crude oil market equation. This is probably the asymmetric response he promised – an act of revenge for the North Stream -2 humiliation and the sanctions he seems unable to remove. Putin failed last time to squeeze the US shale industry out of business and it survived price levels below $ 40 dollars. Most analysts trust there is no reason this time it will be different. Smaller players in the US are likely to suffer, but most have hedged the risk of stock market crashes, and even if they haven’t done so, the ultra-low price period will not last long.
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Putin cannot endure this game and will lose strategically at the end, although some interim wins are possible. The Russian economy is already in a precarious state to take new hits at the moment.
This is a classic Putin bluff at his favorite geopolitical poker game – too easy to call, as he does not hold strong cards. Putin’s closest ally Igor Sechin has probably convinced him to abandon the strategic deal with Saudi Arabia for coordinated production cuts. The Kremlin boss risks devastating recession at home and deep devaluation of the ruble, which, combined with sanctions, could put Russia on a “black swan” track.
Goldman Sachs has suggested that this time prices could fall to $ 20 a barrel, a trigger that would unlock self-destructive processes in the Russian commodity-based economy.
The Central Bank of Russia could continue to print billions of new rubles, with the ruble rate tumbling, but a widening deficit in the federal budget could be difficult to bridge. Putin will have to increase the tax burden on oil companies and other tax cash cows, or he will have to abandon the social promises meant to “sell” to the Russian voters his plan to remain in power with a revised Constitution.
No doubt – this is the greatest gamble in Vladimir Putin’s political life.
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