As hard as it is to believe - given the strength of the "Russia-is-doomed" meme - Crude oil prices for Russia (in Rubles) are unchanged since February... This is important as all costs are Ruble denominated while revenues are USD denominated, leaving Russian oil companies’ margins insulated despite the dollar decline in price. In addition, the Russian government is easing the export taxes which further improve the profitability of Russian oil. So as US Shale Oil sector is destroyed by its USD costs, it appears Putin's core energy industry is somewhat insulated... and America's late-80s "defeat The Sovet Union" playbook is failing.
Reserves are tumbling with the Ruble...
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Did Russia peg the Ruble to Crude? Not quite the crash everyone thinks of...
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As Giannis Kolmer explains,
The subject under discussion is whether or not the “clearing” taking place in the oil markets “rhymes” with the events of 1986 that led to fall of the Soviet Union; and the effects of the devaluation of the Ruble, which I strongly believe will be more favorable for Russia, combined with recent trade agreements.
The last time around the US used oil as a tool to combat Russia (at the time the Soviet Union), on a nominal basis Brent underwent a correction from over $30 toward the range of $11-13.5 where it remained until the defeat of the Soviet Union and the withdrawal of the Red Army from Afghanistan in February 1989 after the signing of Geneva Accords in 1988.
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While successful this time around the Russian’s via Putin are more than able to cope with an oil rout for the near future. Already the devaluation of the Russian Rubble means that oil revenues will in fact be more in Rubles than last year since the devaluation is currently wider than the correction of the oil price itself.
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In many ways, the Ruble is the thing to watch in terms of timing the bottom. Since intervention is ahead of the correction. From 33 to 63 rubles per dollar, that’s almost a 50% devaluation while the correction of oil prices is just nearing the 50% correction level at 52.5 assuming a peak of $105 per barrel. So where does intervention stop? $45 on Brent Crude means 40 to 42 for WTI while in the relationship of USD with respect to the RUB that means 70 to 75 or another few billion worth of foreign reserves while revenues from oil in rubles double at the minimum. Also it is important to remember that Russia has very low debt compared with the 80’s and 90’s.
Meanwhile such weakness in oil markets leads to strength in the Natural Gas sector as the aged, inverse correlation between the two (as oil rises NG prices fall and vice versa) combined with winter conditions boost a price, which in itself is stable-NG prices are not in the process of price discovery but rather in the stage of consolidation, after a violent upswing last winter. While since October NG prices have sold off from 4.5 to 3.7 currently, the 20% drop is nothing compared to the drop in WTI.
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In the meantime, if 1986 is any indication, the process of price discovery “clears out” when the correction enters the 60% territory or in number terms from 105 to 42 dollar per barrel
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So really what all this suggest is that a bounce is to be expected as we head into the winter, however the long term lows suggest that the mid 40’s is where all this end, which coincides with the correction of 86 and a Ruble above 70 per USD.
Anything below 50 is scary for the energy sector, which accounts for a third of capex in a world dominated by buybacks and dividends fueled by cheap financing. But credit markets are already actively taking that option away.
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“Widening”, is definitely the word of the week. However, like in Afghanistan in the late 80’s, in the words of Charlie Wilson, the US "are fucking up the endgame."
After spending a few billion along with the Saudi’s fighting a covert war, the Senate committee in charge of the budget did not see fit for the US to spend a few more million to build schools and infrastructure, indirectly enforcing the belief that God helped the Afghan people, (who for the most part were under the age of 20 at a rate of 1 out of three) fight off the Red Army, not the US taxpayer.
This time, after spending billions to make the USA energy independent, at great risk, they are falsely using a vulnerable geopolitical tool as a weapon against a highly formidable opponent. In the game of career politician versus former spy, like in the game of follow the leader, the bets are in favor of the side with less layers of political red tape and influence.
As George R.R. Martin’s King Robert Baratheon stated “which is the bigger number 5 or 1?... One, one army, united behind one leader with one purpose.
This is not a result of problematic markets. It’s a problem of political stupidity. The question is do you bet on the one leader or on the combination of the Senate, the President, NATO, the Pentagon and all related offensive defensive components in its arsenal.
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Chart: Bloomberg
