Oil Hits Fresh 5yr. Low; No Breathing Room For Putin, Or Russia’s Economy

Oil Hits Fresh 5yr. Low; No Breathing Room For Putin, Or Russia’s Economy

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Oil started out in the green this morning on the back of news that Libya’s 800k barrels per day output is in jeopardy; but, the rally was short-lived, prices reversed — and oil prices are at a new 5yr. low this afternoon. Light Sweet Brent Crude was down $1.45, or 2.44% to $58, while West Texas Crude (WTI) fell 99 cents, or down 1.81 percent to $53.74. CNBC reported today that “the Libyan crisis escalated, as militias roiled the OPEC-member nation states.” “The strife could create a turning point in the months long rout of the oil market that has seen prices plunge as much as 50 percent,” said Franco Blanch, Head of Commodities at Bank of America, during an interview on CNBC’s Squawk On The Street this afternoon. “I do think Libya is a very important supplier. The return of Libya is what started the rout downwards in the first place, so if we see Libya offline for the majority of 2015, it could provide a lot of support for prices here,” he said. But, Andrew Lipow, President of Lipow Associates, a commodities hedge-fund, said this “market continues to react to the oversupply in crude oil; and, the reiteration by the Saudis that they’re not cutting production.”

“We’re going to see $50 in the next couple of weeks for WTI,” Mr. Lipow added. “This could be the first December since 2005, that crude inventories have risen, when we normally expect a drawdown as oil companies meet their LIFO targets.”

Libya is now producing 128,000 barrels of oil per day, Reuters reported, Mr. Lipow said about 500,000 barrels of Libya crude have come off the market recently. The Bank of America estimates the world is oversupplied by about 1 million to 1.2M barrels per day,” Blanch said. The big supply surplus could come in the second quarter of 2015, when seasonal demand is historically weak.

Mr. Blanch projects that crude will rebound in the second half of 2015, and close out next year around the $80 level.

No Breather For Putin, Nor Ruble, As Russian Economy Slumps

Matt Clinch, reporting for CNBC this afternoon, writes that “the Russian ruble tumbled today, building on 2014’s record decline, after new figures showed the country’s economy shrunk in November for the first time in over five years. The U.S. dollar rose as high as $58.91 against the ruble on Monday — a more than a 9.5 percent change — after the Russian Economic Ministry said the country’s gross domestic product (GDP) fell by 0.5 percent last month. This marked the first economic contraction since September 2009, according to Reuters News Service — and comes after the Russian government forecast that the country’s GDP could decline/contract as much as 4.8 percent in 2015.

Russia’s manufacturing sector also shrank for the first time in six months in December, according to the HSBC’s purchasing managers’ index out today. The Russian ruble declined 70 percent since the beginning of 2014, due in large part to the dramatic decline in the price of oil, and international sanctions imposed after Russia’s incursion into Ukraine. Boris Schlossberg, Managing Director at BK Asset Management, told CNBC that Russia’s fortunes are heavily tied to the price of oil next year. “If you have oil staying at $50 for a year, it’s going to create a tremendous amount of pressure over there,” he said.

Others have predicted that Russia could see some domestic unrest, as 50 percent of Russia’s GDP comes from the sale of oil and natural gas. Ian Bremmer, Head of the Global Risk Assessment firm, The Eurasia Group, says the Russian economy is “in freefall.” The London newspaper, The Guardian, notes that “the fall in oil prices comes at a time when Western sanctions imposed over Russia’s backing for separatists in Ukraine are making it tough for the country’s banks to raise finance in the international money markets, leading to billions of dollars being withdrawn from the country.

“This is the beginning of a recession,” said Ruslan Grinberg, Director for the Institute of Economics at The Russian Academy of Sciences, in an interview with the French newspaper, Agency France Presse. Dmitry Polevoy, the Chief Economist for the Russian Commonwealth of Independent States at ING Bank in Mowcow, told Reuters “things would get worse with oil prices at their current levels. There is no cause for optimism,” he said. “This is linked to sanctions first of all, and oil and panic we saw on the market in December. The damage to the banking system and consumer sentiment will take a long time to repair.”

I may be wrong; but, I still think if things do get worse in Russia, we could finally see our stock market begin to feel the side-effects — particularly if we begin to see domestic unrest and/or a run on banks. The average salary in Russia at the beginning of 2014 was in the neighborhood of $13,500 per year. Due to the implosion in oil and the ruble’s freefall, that $13,500 salary is now down to a mere $6,000 or so. Stay tuned. V/R, RCP

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