Russian equities are below fair price even if you assume a negative scenario for oil

Can you forecast oil prices at the end of April, May or June? We cannot. The answer depends on factors which are very hard to predict in the current chaotic environment: How strict will the quarantine measures be in different countries, and how long will they last?

Will they also affect oil production? How much oil will be added to various countries’ reserves? Will the OPEC+ deal return to the table? Will the US join the deal? Any and all of these factors could lead to sharp rises or falls in oil prices.

What we can assert with greater confidence is that:

  • Russia is well equipped to weather several quarters of extremely low oil prices.
  • Russia can withstand even the negative scenario of Urals crude to stay in the range of USD 10-15/ bbl until the end of 2020 and gradually recovering to USD 37-40/bbl only by the end of 2021
  • Russian equity prices are below a fair price level, even if you assume the above mentioned negative scenario.

We retain our view that crude oil prices are likely to recover to above USD 40/bbl for Brent and USD 37/bbl for Urals over the next 12 months. This implies a 50% upside to fair price for the Russian equity market.

Short-term oil price predictions are meaningless

It is impossible to reasonably predict the movement of oil prices over the next several months due to the following factors:

  • Impact from COVID-19 quarantine measures

There will likely be a significant drop in oil consumption during the coming months due to further global quarantine measures. How big a drop? That depends on the measures, their duration and many other factors, all of which are nearly impossible to predict. The huge standard deviation of current predictions support this. For example, Goldman Sachs expects a fall of 19 million barrels per day (mbpd) in oil consumption in April, while the US Energy Information Administration (EIA) expects a contraction of only 1 mbpd. The Russian Energy Ministry, Vitol, Gunvor and HIS on average expect demand to decline by 10-15 mbpd in the second quarter. On the supply side, quarantine conditions may also result in production cuts. If major producers decide on a total lockdown, output will suffer drastically. This factor can narrow the supply gap and potentially boost prices. But again, whether that will happen is hard to say.

The EIA expects Brent crude to average around USD 37/bbl in Q2 2020 and then rise to USD 42/bbl average for the second half of 2020. The EIA then expects declining global oil inventories to create upward pressure on prices and forecasts average 2021 prices to be at around USD 55/bbl. In its latest report, the International Energy Agency (IEA) predicted that crude oil prices will average USD 38/bbl in 2020, rising to an average of USD 50/bbl in 2021.

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