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Moscow Times
June 1, 2009
Crude Is Back for Now, But Not on Demand
By Courtney Weaver / The Moscow Times

This year's federal budget, which only recently appeared doomed to an ugly 8 percent deficit, is beginning to look a lot healthier thanks to spiraling inflation, a weakened currency and a surge of optimism.

And while the Central Bank has devalued the ruble and announced plans to print 3 trillion more, the heroes of this story are, of course, OPEC and the United States.

The U.S. Federal Reserve is funding a massive spending program to dig the economy out of recession with a steady stream of freshly printed dollars, sending investors scrambling from the safety of the greenback back to the inflation-haven commodities, including crude.

And the optimism, also flourishing in the new U.S. administration, was served up last week by the Organization of the Petroleum Exporting Countries. The oil cartel's secretary general, Abdalla el-Badri, said Thursday that crude would range between $60 and $70 per barrel for the remainder of 2009, well above the target of $50 set just a month ago.

OPEC's decision to leave output quotas unchanged had already been priced into the market for at least a week, Renaissance Capital analyst Tom Mundy said, and while the forecast is "definitely optimistic" it's also "not unrealistic."

The price of crude has added 27 percent in May, keeping pace with a Russian equity rally that many supposed was ending, and on Friday evening was trading at more than $65 per barrel, up 7.2 percent for the week.

While hopeful forecasting is one way for OPEC to support prices without actually cutting output, oil could still face a correction of 10 percent to 15 percent before they see anything near the levels that they were predicting, Mundy said.

"If you look at the actual hard data, there are very few indicators that demand is actually increasing," he said.

Overstocked U.S. oil inventories look to become an issue in coming weeks, especially if gasoline demand fails to pick up during the summer driving season. On U.S. roads, truck traffic will lag behind last year's figures because of the economic slowdown, and those feeling the pinch may be reluctant to pay double what they did in the fourth quarter for gasoline, said Viktor Mishnyakov, an oil analyst at UralSib.

While such factors, along with depressed demand, could push oil as far down as $45 to $50 per barrel, OPEC's prediction could become a reality if the United States continues printing money and using it to purchase commodities, Mishnyakov said.

"If inflation goes through the roof, if the dollar plummets to $1.50 per euro, oil can go to $70 easily," he said.

"The more we price in inflation, the more we can expect the oil prices to rise," Mundy said.

In April, the Economic Development Ministry raised its 2009 average forecast for Urals crude to $45 per barrel, while the budget is based around a price of $41 for the country's main export blend.

The dollar was trading at $1.41 versus the euro on Friday afternoon, following its biggest drop against the currency in a month. On the Russian exchanges, oil companies benefited from OPEC's optimism and led the indexes to finish the week with a three-day rally.

The MICEX Index reported a weekly gain of 6.6 percent, closing at 1123.4 on Friday, while the RTS Index rose 7.3 percent, finishing at 1087.6.

For now, however, Russian officials can't be sure whether they're allowed to share in this new optimism. On Monday, Finance Minister Alexei Kudrin said his "conservative" forecast for 2010 was $50 oil, following a meeting where President Dmitry Medvedev urged the government to be more cautious with their economic forecasts. Kudrin declined to give an optimistic scenario.

A day later, Medvedev told Russian businessmen not to expect any more gloom from his government, either.

"When my colleagues from the government say that Russia will not come out of the crisis for another 50 years, it is unacceptable. If you think so go and work somewhere else," he said, apparently referring to Kudrin's warning in April that Russia shouldn't expect such strong economic conditions for "five, 10, 20 or 50 years."

Luckily for Kudrin, the coffers might start growing either way.