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Russia Can Handle Oil Below $20 a Barrel Better Than the West

The analysis by the head of the Bremer Landesbank shows Russia has the margins for $20 oil to be profitable

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This post first appeared on Russia Insider


Originally Appeared at German Economic News. Translated from the German by Werner Schrimpf


The chief economist of Germany's Bremer Landesbank, Mr. Folker Hellmeyer, published an interesting analysis. According to his findings, countries like Russia and Saudi-Arabia are in a position to operate profitably even at an oil price level of $20 US per barrel, at the same time, Western producers are getting in trouble.

Western oil producers like Norway are unable to operate profitably at current oil prices.

Quelle: Bremer Landesbank, Forex Report vom 22. Januar 2016

Source: Bremer Landesbank, Forex-Report from January 22, 2016:

The chief economist of Germany's federal bank, Bremer Landesbank, Mr. Folker Hellmeyer, has analyzed the development of the oil prices and comes to the following conclusions:

  • We recommend further investigation as to whether the decline of the oil prices was caused by an inflated offer and/or a declining demand.

 

  • It is a fact that the demand for oil increased in 2015 and is increasing further. If there were to be a decline in demand, we would have reason to be worried.

 

  • It is a fact that new technologies provide a higher level of energy efficiency, and to some extent, fossil energy sources will be substituted by alternative energy sources.

 

  • Having said this, it becomes obvious that the oil price is losing its relevance as an economic indicator when comparing different economic time periods. This is the 2nd finding and it is of upmost importance.

 

  • It is a fact that a low oil price will stimulate domestic economies within the Euro Zone.

 

  • It is a fact that producers have increased oil production during this price crisis in a pro-cyclical manner, and are therefore making the situation worse. The rationale is that producers have to generate cash in order to fulfill their debt service, i.e. fracking and shale oil producers.  But this game is finite. The longer we see this low price level, more and more players will be forced to exit the market and this will lead to a reduction of oil output and we will experience shortages again. (That means weakness cannot be a sustainable trend!)

 

  • It is fact that just Russia and Arab countries will be able to bear a price level of 20 US$ per barrel for the long-term.

 

  • Keeping all these findings in mind, it is a fact that the price collapse on oil markets will be just a temporary phenomenon.

 

  • It is a fact that a viewing the current oil inventory data alone is not enough to provide a reliable indication concerning the long-term price trend.

 


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