Chemical laboratory of the oil refinery owned by Yuganskneftegaz - main production subsidiary of the besieged Russian oil company Yukos - in the Siberian town of Nefteyugansk.
Photo: Alexey Myakishev
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Economic Prognosis
December is here, and Vlast analytical weekly presents its economic prognosis for the month as usual. Experts will speak about the changes awaiting dollar rate on Russia’s currency market, the inflation, world oil prices, and dollar and euro rates on the global currency market in December. But first, let us have a look at the major economic event of November.
The main economic event in November has to be the fact that world oil prices reached almost $100 a barrel. On November 21, trading closed at $99.29 a barrel. What was in recent years regarded as OPEC’s hypothetic threat to western countries (they said prices might reach even the unbelievable $100 a barrel in extraordinary circumstances), has actually happened in quite usual circumstances.
OPEC decided in September to increase production by 500,000 barrels a day. The decision came into force on November 1. Western observers estimated that in reality production increased by 720,000 barrels a day. So, there was no shortage of oil on the market.
However, international investment and pension funds, that had already invested huge money in oil futures, decided to keep going bull and continued buying up the futures. Those funds reasoned that speculating for the rise had been so far bringing them huge profits: oil price grew by 48 percent in the period from August to November. Oil price (and profits) grew because bull players produced demand for oil futures: if you don’t buy them today, they’ll be more expensive tomorrow. The bull campaign turned into a prognosis coming true by itself: the funds predicted price growth and secured the prognosis’ fulfillment by their own actions.
OPEC said it has no relation to the price growth. Saudi Arabia’s Oil Minister Ali al-Naimi said: “There is no connection between oil supply on the market and oil price. The demand-and-supply ratio is not the basis for high oil prices now. World market is provided with enough oil.” As usual, OPEC members said the price growth is due to the increase in geopolitical tension, and to the shortage of oil-refining capacities in the West: the deficit in oil products creates an impression of crude oil deficit.
In this situation, the raise of OPEC quotas looked like the cartel’s desire to gain the maximum of petrodollars while prices are still high, as long as there is enough oil on the market anyway. However, we cannot say OPEC did not affect oil prices at all in November. During the cartel’s summit in November, the oil-producing countries said they are forced to raise the prime cost in order to compensate their losses caused by dollar’s fall in the dollar-euro exchange rate. Iran and Venezuela insisted that all OPEC members should give up setting prices in dollars. These statements did not help the U.S. currency’s stabilization. Everyone had an impression that OPEC states want dollar to keep falling, and world oil prices to keep growing.
By the way, the OPEC summit in November was just the third one in the cartel’s entire history. The second summit in 2000 had Venezuela’s President Hugo Chavez, who acted as the cartel’s chief ideologist, declare that world oil prices should definitely grow: “The West must pay for its richness. Where would it be without our oil!” Afterwards, Chavez repeatedly predicted $100 a barrel as a response measure to the U.S. pressure on Venezuela.
Certainly, the geopolitical tension has also contributed to the price growth in November. Oil analysts said the prices would soar up to $200 a barrel in case of exacerbation of the U.S.-Iran relations, since the level of $100 a barrel has practically been reached.
The November price growth made Russia’s authorities certain of further petrodollar abundance. Russian officials announced the country’s stabilization fund will make up 3 trillion 836 billion rubles by January 1, 2008. Meanwhile, the Finance Ministry of Russia predicted the stabilization fund would reach about 3.540 trillion rubles by the end of 2007. Moreover, Finance Minister Alexei Kudrin said on November 28 that not only the stabilization fund, but the Central Bank’s gold and foreign currency reserves are rapidly growing as well: “This year, the Central Bank will have a record inflow of gold and currency reserves – about $150 billion.” The capital inflow to Russia will reach up to $80 billion, the Finance Ministry estimated. Kudrin added that his ministry “did not expect so high capital inflow and so high oil prices” when planning this year’s budget.
Record oil prices in November also allowed explaining the extremely high domestic inflation in Russia by international factors. “When inflation isn’t 2-3 percent, but is 9-11 percent, then it is clear that 80-90 percent of its factors are of strictly monetary nature,” said Kudrin. That is, these factors are first of all related to petrodollars. Moreover, the minister also interlinked the record oil prices with common citizens’ earnings and expenses, while the citizens often have absolutely no idea of what OPEC and global investment funds are doing. “Citizens have money which they spend on durable goods, mortgage, and other purposes. So, they are now ready to pay more for food, in order not to lower their living standard,” said Kudrin. Thus, not only oil records, but also the Russian people’s extravagancy is to be blamed for the inflation.
Sergei Minaev
1. What will happen to the dollar-ruble exchange rate?
In our prognosis for November, we said that dollar will not be strong in the world, and consequently will not exceed 25 rubles in Russia anyway. The prognosis came true: one dollar cost just 24.35 rubles on November 30.
The Central Bank (CB) found itself in a difficult situation. According to the Finance Ministry’s concept, 80 percent of the current inflation in Russia (which is the highest in recent years) is explained by monetary factors. Meanwhile, the CB is the one responsible for those factors. In fact, to show its own achievements in restraining the inflation, the CB once offered to determine basic inflation which is due to the factors under the bank’s control, -- monetary and foreign currency policy. Also, the CB underlined that seasonal and administrative factors are beyond its scope. Yet, the question now is not who proved more skill in keeping the inflation in check. The question is who should be blamed for the inflation’s steady growth.
So, the CB is forced to be especially active in currency policy. The bank has even announced it is ready to give up its current concept of a controlled currency rate. Meanwhile, everyone knows the CB determines the national currency rate at its own will, despite all official statements that the ruble has become a completely free currency. However, the CB takes into account objective economic circumstances like world oil prices. It was said that in order to fight the inflation, the bank could immediately switch to a completely floating rate. Yet, fluctuations will be such that citizens might stay dissatisfied.
Our prognosis: in December, dollar will remain weak, but its rate will not fall below 24 rubles. That would be too much.
2. How consumer prices in Russia will change?
We predicted that inflation would remain relatively high in November, but would be less than 1 percent. The prognosis came true. Although the month’s final results have not been summed up yet, the Economic Development and Trade Ministry’s preliminary estimation says the inflation made up around 0.9 percent.
Inflation could not slow down altogether, because Russian citizens, worried by the news about the complete collapse of the Russian authorities’ anti-inflation plans, keep showing the growth of inflation expectations, do not get surprised at price growth, and spend money readily, following the rule “buy today, because tomorrow it will be more expensive”. However, some decrease in inflation as compared to October was expected. After all, the authorities resorted to administrative control over price growth. In November, the authorities began saying that despite the obvious collapse of anti-inflation policy, the fastest growth of consumer prices is over, and everything will be quite all right further on. At the same time, the officials insist that some outer factors are to be blamed for the inflation upsurge, from the fact that food production in Europe is no longer to be subsidized, to the record international oil prices. This optimism is quite understandable: new year is coming up, and the authorities need to plan another anti-inflation breakthrough, as usual, by assuming higher obligations. It won’t do just to set the task to decrease inflation as compared to 2007: inflation was lower than currently in 2006. It is necessary to make inflation as low as never before.
Russian salespeople made their own conclusion. Now, raising the prices, they seem to be telling the citizens: “And what do you want? Look at inflation in the country. We just have to raise prices.”
Our prognosis: considering the salespeople’s inflation expectations, the inflation in December will exceed 1 percent.
3. What will world oil prices be?
We predicted that November would become one more month of super-expensive oil, and that oil price would anyway be higher than $85 a barrel. Our prognosis came true. Oil was super-expensive; it reached $100 a barrel. On November 28, traders were offering $90.6 for a barrel of U.S. WTI, and $89.7 for a barrel of North Sea Brent.
Despite oil price records, it became clear that international pension and investment funds are growing careful while the year is coming to its end. Notably, oil prices did not exceed the $100 mark. Just a few cents were necessary to reach it. At any moment, the funds are ready to switch from buying oil futures to selling them, and that might be a quite determined sale. By the month’s end, oil became $10 a barrel cheaper in just one week, while a decade ago one barrel cost just $10 in total. The ten-dollar decrease in price was due to news that U.S. oil refineries have enough oil in storage, and due to even a supposition that OPEC, at its conference in December, might decide to once again raise production quotas. Yet, the cartel’s previous decision to increase quotas since November 1 made the prices grow, and not fall. Oil market players took the increase as unimportant for prices, and kept going bull. Now, they are prepared for oil’s becoming cheaper, and want to use all opportunities to gain profits from the previous price growth.
Our prognosis: everyone was so impressed with the $100 a barrel that there will be no mass oil sale in December. Oil will cost over $80 a barrel.
4. How the dollar and euro will fare on the world currency market?
We predicted that euro will cost at least $1.4 in November, due to enthusiastic anti-dollar playing. The prognosis came true. Euro reached almost $1.5, and $1.48 was offered for one euro on November 28. The expectation of further decrease in U.S. interest rates still remains the main circumstance letting currency speculators storm the $1.5 mark, which is as symbolic for the currency market as the $100 mark is for the oil market. Currency traders long ago forgot the theory according to which dollar should be weak because the U.S. has huge deficit in trade balance and external payments account, and this deficit can be corrected only by means of dollar’s devaluation.
It turned out the U.S. is quite capable to live with that deficit, and dollar is still in demand in the world. At least, because Asian central banks keep increasing their dollar currency reserves. Meanwhile, the only theory the players remember is the one where a currency exchange rate is determined by the difference in interest rates in the countries which use those currencies.
U.S. Federal Reserve System is forced to play against dollar, because it frequently complains of economic growth slow-down in the U.S., especially of poor state of consumer demand, thus making it clear it does not exclude lowering the rate. At the same time, the U.S. undergoes some speed-up of inflation (certainly, it is not as drastic as in Russia). On the one hand, this speed-up prevents the FRS from immediately lowering the rate. On the other hand, weakness of a currency inside a country negatively affects it on the international currency market as well.
Our prognosis: the expectations for lower U.S. interest rates will not let dollar strengthen in December, and euro will cost over $1.45.
All the Article in Russian as of Dec. 03, 2007
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