The balance of supply and demand in the world oil market began to be disrupted in the last 8-10 years, when, with relatively high prices for WTI and Urals oil ($ 100-120 per barrel), shale oil producers began to increase production and market share .
A feature of shale oil is its higher cost, which is $ 35-50 per barrel, but has an annual downward trend due to an increase in operating efficiency. This is one of the most significant factors that led to three world crises in the oil market - 2014,2016 and 2020. During these crises, the price of Brent, WTI and Urals oil dropped to $ 19-30 per barrel, which is an anti-record since the 2000s.
In March 2020, a sharp decline in the world oil price was caused by a reluctance to continue to participate in the OPEC deal to reduce oil production by Russia in order to stimulate support and increase in prices, which were reduced due to the spread of coronovirus in the world and a decrease in the demand of the world’s major economies for energy resources - China and the USA. As a result, the price of main grades of oil fell to $ 20-25 per barrel, which does not allow shale oil producers to increase production and ensure current volumes, since the final price of oil is lower than the cost of its production. For individual countries, the final price of oil comes close to the cost of its production, which will result in 2020-2021. to a sharp reduction in production and Capex.
The dynamics of the price of Urals crude oil in 2000-2020 is illustrated below in dollars and rubles per 1 barrel. The dollar chart is needed to understand global dynamics and oil prices, which reflects the overall market situation. In March 2020, world oil companies are even worse off than in 2008, not even considering cost inflation, which over 12 years averaged over 15-20%. In the current situation, the financial stability of world oil companies will decrease significantly, the risks of defaults on bond loans and loans will increase, the likelihood of bankruptcy will increase, and most likely, company management will refuse to pay dividends.
It should be noted that the large global and Russian investment banks issue forecasts for the price of Brent and WTI crude oil every quarter and half a year, however, most of these forecasts come true only when the oil market has low volatility in the next 6-12 months, so the real and forecast prices differ by no more than $ 5 per barrel. For example, the current drop in oil prices to 25 and even to $ 35 per barrel. in 2020, it was not predicted by any leading agency or investment bank. At the same time, in March 2020, Goldman Sachs did not rule out a fall in Brent oil prices in 2020 to $ 20 per barrel, but a forecast was issued when the market price was already $ 30 per barrel, rather than $ 50-60 ./barr.
In order to evaluate the price pressure on Russian oil companies, first of all, it is necessary to look at the dynamics of the Urals brand ruble price, since Russian companies mainly rely on ruble indicators to form the basis for calculating taxes, dividends, the investment program and cash flow. The second reason is that most of the operating costs are in rubles, so apples must be compared with apples. The third reason is the floating exchange rate, which was established since the end of 2014 and which, basically, changes sharply with the movement of world oil prices.
As can be seen from the graph below, the maximum oil prices for Russian companies were by no means in 2008 and not in 2014, when a barrel of oil was sold for 3-4 thousand rubles, and in the summer of 2019 - 5.5 thousand rubles, which is the absolute maximum. That is why, when there was a sharp collapse in prices up to 1.5 thousand rubles. for 1 barrel (-72.3%), the shares of Russian oil companies were hit harder than Exxon Mobil, Royal Dutch Shell, Chevron and others, even despite the lower cost of production (7-15 dollars per barrel). On the other hand, at the moment there is only a local minimum and a drop, in fact in 2009 the minimum was still 30-35% lower - about 1.0 thousand rubles per barrel, which indicates the possibility of a stable activity of Russian oil industry workers in current realities. At the same time, the bankruptcy of smaller companies can lead to sharp consolidation and M&A transactions in the industry, which will favorably affect the main companies of the Russian oil market in the long term - Rosneft (ROSN), Gazpromneft (SIBN), Surgutneftegas (SGNS), Lukoil (LKOH), Tatneft (TATN) and others.
We believe that those local peaks that were achieved in stock prices of Russian oil companies in mid-March 2020 may be the most favorable for long-term investments over a horizon of 1 year. We expect the stocks of the major oil companies Rosneft, Gazpromneft, Surgutneftegas, Lukoil, Tatneft to grow by 40-50% or more on the horizon 2020-2021, however, we do not exclude the need to wait the next 1-2 months in money to understand the development of the global economy in connection with with the spread of the coronovirus in order to minimize the risks of investing in equity. In conclusion, we note that most of these companies pay dividends in June-July of each year, so the ideal moment for buying stocks may be just April-May 2020, but there are risks of transferring dividend payments to a later time (up to 90 calendar days in connection with the decision of the Government of the Russian Federation).