The price is affected by a too strong ruble and a discount in the price of Russian oil to North Sea Brent.
Yesterday, the Russian President announced that from January to April 2022, the federal budget was reduced to a surplus of 2.7 trillion rubles. This was due to an increase in income from more expensive energy resources, as well as a reduction in spending due to sanctions. However, at the end of the year, the federal budget may well be reduced even to a deficit – raw materials revenues are falling, while expenditures are growing.
The price of Russian grade Urals oil in rubles fell below 5 thousand per barrel – on May 12 it cost 4880 rubles. This is the minimum value since August last year, and it is associated with two factors:
- abnormal strengthening of the ruble – the dollar and the euro rolled back to the values of February 2020;
- price spread widening for Urals to the price of the North Sea Brent oil – if at the beginning of March the difference was 10%, now it reaches 30%.
The difference in prices is a kind of “sanctions” discount from the price of oil. Previously, the spread was much lower, due to the difference in the technical parameters of oil (Russian oil is of a lower grade than the North Sea), but now it’s all about the sanctions. In addition to the oil embargo in a number of countries, many companies voluntarily refused to purchase Russian oil.
Officially, oil exports have declined, and now it also costs 30% less than Brent – apparently, this is a “discount” for the fact that foreign buyers take risks by cooperating with Russia.
Due to the decline in oil prices below 5 thousand rubles per barrel, there is a serious risk that the budget will be reduced to a deficit at the end of the year. The average selling price of oil since the beginning of the year is 7.4 thousand rubles, but in April it fell to 5.8 thousand. Most likely, without taking appropriate measures, the price will continue to fall. Taking into account the government’s plans to increase federal budget expenditures (1.5 trillion rubles to pay OFZ, 4 trillion to support the economy), as well as a forecast for a reduction in oil and gas revenues from 9.5 to 8.7 trillion rubles, the risks of shortages become apparent.
Probably, at the end of the year, the federal budget deficit will be about 2-2.5% of GDP, which differs markedly from the plan. To remedy the situation, the Central Bank may begin to ease foreign exchange restrictions – for example, ease the requirements for the sale of foreign exchange earnings by exporters. But in this case, there is a risk of a sharp weakening of the ruble – if it falls, it will be more difficult for the economy to adapt to new conditions.