OPEC ministers met in Vienna last week to discuss a question that could have a far greater impact on Russia in the coming year than the heated debate about candidates for the forthcoming presidential elections the global oil price.
Faced with renewed supplies in North Africa and a potential decrease in demand in the developed world, ministers at the Organization of Petroleum Exporting Countries meeting raised limits on production for the first time in three years, a move that instantly drove down the oil price and caused a 1 percent drop in Russian stock futures.
And although analysts say the tight supply-demand balance could swing the oil price either way in 2012, most forecast a drop of around $10 on this year's average of around $110 a barrel.
"We think the oil price is likely to average lower next year than this year because we expect the market will move from an undersupplied situation to a slightly, but not radically oversupplied situation, and OPEC spare capacity will increase," said Colin Smith, head of energy research at VTB Capital.
Still hooked
Despite efforts to diversify, Russia's economy is just as dependent on oil exports now as it was during the 2008 economic slump, when a drop in the oil price to $35/barrel caused a 7.9 percent contraction in the Russian economy and sent unemployment soaring.
In fact, if anything, Russia has only become more vulnerable to a drop in the oil price. A key factor for assessing any oil-producing country's vulnerability to drops in the oil price is its breakeven oil price the average price required by the government in a year to balance its budget.
And in Russia's case, the government has gone on a spending spree, driving the breakeven oil price to $110 a barrel, far higher than the conservative levels it was kept at before the 2009 crisis.
Supply instability
In 2011 the Russian economy was buoyed along by an oil price pushed up by a combination of tight supply due to unrest in the Middle East and high demand from the developing world.
Analysts say that while it is clear that the simmering unrest in the Arab world and the economic problems in Europe will likely be the key drivers of next year's oil price, it is difficult to determine how far they will sway it.
On the supply side, the major factor analysts are watching is the Middle East, where a string of uprisings and revolutions this year caused fears of reduced supplies from several major oil producing regions, sparking a jump in global oil prices.
The main disruption to supplies in 2011 came from a civil war in Libya, which normally produces around 2 percent of global production. Now that relative stability has returned to the country, International agencies expect Libyan production to return to pre-war levels in mid-2012.
"If anything we should get an easing of supply next year because Libya will be coming back on stream. Libya coming back implies more supply, which implies a lower price," said Artyom Konchin, an oil and gas analyst at the UniCredit investment bank.
But analysts also note the potential for renewed disruptions to oil production in the region, which could cause oil to trade higher than expected.
"I doubt we have seen the end of instability in the Middle East, not least because in quite a number of the countries the Arab Spring events are still ongoing, or it's far from clear what the new government structures will look like. There may be a fair amount left to go with this story," said Colin Smith, of VTB Capital.
Under close observation are Saudi Arabia, where a repressive government has recently increased spending to placate an increasingly restless population, and Iran, where Western sanctions are putting pressure on oil production. Since Saudi Arabia accounts for some 12 percent of global oil production, and Iran 5 percent, unrest in either of those countries would be a huge shock to the oil price.
Crisis looming
On the demand side, the big question mark is Europe, Russia's biggest energy consumer, which is currently on the threshold of a recession.
Analysts say that while a recession in the region would cause a drop in the oil price, the biggest threat would come from a knockon drop in economic growth in China, the world's second biggest consumer of oil.
"For Russian investors, the impact will be felt both in terms of market sentiment and real damage. A recession in the EU would have more of an impact on sentiment, as Russia's main exports to the region are oil and gas," Troika Dialog investment bank said in a recent report looking at the markets in 2012.
In view of the expected economic slump, the International Energy Association recently cut its oil demand forecast for 2012 by 500,000 barrels a day. The forecast reflect the prospects of a mild recession in Europe, no demand growth in the United States and a reduction in forecasts for China.
Troika's baseline scenario forecasts the eurozone recession to lead to slower growth in China in early 2012, possibly knocking the oil price to as low as $85 a barrel, but for demand to start picking up again mid-year on signs of a recovery.
And if the signs of recovery don't come, whoever takes charge after next year's presidential elections could be looking at a challenging year in office.
OPEC ministers met in Vienna last week to discuss a question that could have a far greater impact on Russia in the coming year than the heated debate about candidates for the forthcoming presidential elections the global oil price. Faced with renewed supplies in North Africa and a potential decrease in demand in the developed world, ministers at the Organization of Petroleum Exporting Countries meeting raised limits on production for the first time in three years, a move that instantly drove down the oil price and caused a 1 percent drop in Russian stock futures.
And although analysts say the tight supply-demand balance could swing the oil price either way in 2012, most forecast a drop of around $10 on this year's average of around $110 a barrel.
"We think the oil price is likely to average lower next year than this year because we expect the market will move from an undersupplied situation to a slightly, but not radically oversupplied situation, and OPEC spare capacity will increase," said Colin Smith, head of energy research at VTB Capital.
Still hooked
Despite efforts to diversify, Russia's economy is just as dependent on oil exports now as it was during the 2008 economic slump, when a drop in the oil price to $35/barrel caused a 7.9 percent contraction in the Russian economy and sent unemployment soaring.
In fact, if anything, Russia has only become more vulnerable to a drop in the oil price. A key factor for assessing any oil-producing country's vulnerability to drops in the oil price is its breakeven oil price the average price required by the government in a year to balance its budget.
And in Russia's case, the government has gone on a spending spree, driving the breakeven oil price to $110 a barrel, far higher than the conservative levels it was kept at before the 2009 crisis.
Supply instability
In 2011 the Russian economy was buoyed along by an oil price pushed up by a combination of tight supply due to unrest in the Middle East and high demand from the developing world.
Analysts say that while it is clear that the simmering unrest in the Arab world and the economic problems in Europe will likely be the key drivers of next year's oil price, it is difficult to determine how far they will sway it.
On the supply side, the major factor analysts are watching is the Middle East, where a string of uprisings and revolutions this year caused fears of reduced supplies from several major oil producing regions, sparking a jump in global oil prices.
The main disruption to supplies in 2011 came from a civil war in Libya, which normally produces around 2 percent of global production. Now that relative stability has returned to the country, International agencies expect Libyan production to return to pre-war levels in mid-2012.
"If anything we should get an easing of supply next year because Libya will be coming back on stream. Libya coming back implies more supply, which implies a lower price," said Artyom Konchin, an oil and gas analyst at the UniCredit investment bank.
But analysts also note the potential for renewed disruptions to oil production in the region, which could cause oil to trade higher than expected.
"I doubt we have seen the end of instability in the Middle East, not least because in quite a number of the countries the Arab Spring events are still ongoing, or it's far from clear what the new government structures will look like. There may be a fair amount left to go with this story," said Colin Smith, of VTB Capital.
Under close observation are Saudi Arabia, where a repressive government has recently increased spending to placate an increasingly restless population, and Iran, where Western sanctions are putting pressure on oil production. Since Saudi Arabia accounts for some 12 percent of global oil production, and Iran 5 percent, unrest in either of those countries would be a huge shock to the oil price.
Crisis looming
On the demand side, the big question mark is Europe, Russia's biggest energy consumer, which is currently on the threshold of a recession.
Analysts say that while a recession in the region would cause a drop in the oil price, the biggest threat would come from a knockon drop in economic growth in China, the world's second biggest consumer of oil.
"For Russian investors, the impact will be felt both in terms of market sentiment and real damage. A recession in the EU would have more of an impact on sentiment, as Russia's main exports to the region are oil and gas," Troika Dialog investment bank said in a recent report looking at the markets in 2012.
In view of the expected economic slump, the International Energy Association recently cut its oil demand forecast for 2012 by 500,000 barrels a day. The forecast reflect the prospects of a mild recession in Europe, no demand growth in the United States and a reduction in forecasts for China.
Troika's baseline scenario forecasts the eurozone recession to lead to slower growth in China in early 2012, possibly knocking the oil price to as low as $85 a barrel, but for demand to start picking up again mid-year on signs of a recovery.
And if the signs of recovery don't come, whoever takes charge after next year's presidential elections could be looking at a challenging year in office.