On Monday, December 1, oil prices fell to where they were five years ago. On London’s ICE Brent futures contracts with delivery dates in January 2015 dropped by 3.6% to $67.7 per barrel. Crude has never been that cheap since October 2009.
The oil slump sent the dollar on MICEX up 2.59 rubles against Friday’s close to 53.05 rubles, and the euro, up 3.15 rubles up to 66.5 rubles. Half of those polled by the public opinion foundation FOM in November acknowledged that currency exchange rates had already affected their lives, and 45% began to follow market trends more closely.
“The ruble’s revaluation follows the fall in oil prices and the Russian currency’s future in the near term will depend heavily on oil quotes,” says ING chief economist Dmitry Polevoi.
Crude oil accounts for a third of Russia’s export, according to the federal statistics service Rosstat. The lower its prices, the smaller the incomes of the oil companies and, consequently, the lower the rate of the ruble.
Oil prices entered a steep decline after the International Energy Agency, incorporating the largest oil consumers, in the middle of last September downgraded its world oil consumption forecast to 92.6 million barrels a day. Brent slumped to below $100 per barrel. The declined continued after the November 27 session of OPEC decided to keep oil production quotas unchanged.
The downfall continued on Monday on the news the Chinese industry’s business activity index in November had declined to 50.3 points from 50.8 points in October.
The dollar’s current surge, too, is an argument in favour of low oil prices, say Capital Economics experts, because oil prices are denominated in the US currency.
“Over the past few days the US dollar has been up against a wide range of currencies. Its years-old records against the Japanese yen have been renewed,” says GLOBEX bank senior trader Igor Zelentsov. “This is happening against the backdrop of dwindling oil prices following OPEC’s decision to maintain outputs. Expectations of a decision to raise the US interest rate next year, with the other central banks adhering to soft monetary policies, provides still more support for the dollar.
Last week the ruble lost 9.3% to go down to 50.4085 per dollar, showing the worst performance among the Bloomberg-monitored currencies of 24 developing countries. “The outlook for rouble assets is pretty bleak because everything is against them,” Bloomberg quotes Richard Segal, head of international credit strategy at Jefferies International as saying.
“If oil stays at about $70 per barrel, the rouble’s rate will be revised to 45-47 rubles from 41 rubles toward the end of this year, and by the end of 2015 it will be raised to 48 roubles from 42 rubles per dollar,” Alfa-bank economists have told investors.
The ruble’s fall will depend on crude oil quotes, many economists have been saying with certainty. Analysts at Deutsche Bank, Nomura and BNP Paribas see the local bottom at $60 per barrel - any price below that level would make most shale projects in the United States unprofitable. “The falling oil complements the list of unfavourable factors for the ruble,” says Zenit bank analyst Vladimir Yevstifeyev. “Devaluation fears are growing at a time when no measures other than technical ones are at hand to stem the ruble’s fall. This week the Russian currency will most probably continue to lose ground, but measures by the Central Bank to restrict rouble liquidity at the banks’ disposal may help ease excessive tensions,” he believes.