"The Russian budget may lose ₽500 billion of revenues per month"

Sergey Kondratiev, Deputy Head of the Economic Department and Alexander Titov, Head of the Global Oil Market Sector of the Energy Departmentat at the Institute for Energy and Finance, commented to the Internet portal Gazeta.Ru on Joe Biden's proposal to China to use oil strategic reserves and set volumes for sale on foreign markets to reduce fuel prices.

President Biden appealed to Chinese President Xi Jinping to release crude oil from its strategic reserves in a move that would aim to stabilize rising oil prices following the example of Washington. The combined reserves of these two countries are over 900 million barrels. If Beijing agrees, in the most negative development of events, the Russian budget could lose trillions of rubles.

Worst case scenario

“If oil prices fall to $ 25 per barrel and the exchange rate falls to 100 rubles per dollar, oil and gas revenues of the Russian budget may decrease fivefold, and the country will lose over 500 billion rubles a month,” Sergei Kondratiev, senior expert at the Institute for Energy and Finance explained.

Kondratiev notes that a significant part of the oil reserves are stored for a rainy day - this is insurance in case of a serious military crisis. In the current situation, the United States and China will not agree to release even half of the strategic reserve: this may have the opposite effect - after a short-term collapse, oil prices will start to skyrocket and cause unnecessary panic in the market.

According to the expert, the maximum that both countries can go to is to reactivate 20-30 million barrels each. “For the United States, these are not the first operations of this kind, the Americans have resorted to freeing up stocks over the past 20 years, when difficult situations arose in the commodity markets. However, this has always been an insignificant share of the monthly consumption level,” the analyst said.

In his opinion, Biden is now simply "probing" the ground and observing the reaction of other key players in the global oil market. Even in the case of a “release” of large enough volumes of fuel to the market, the United States and China will not “drop” the oil price below $ 60-65 - the economies of both countries are not ready for a sharper fall.

Will China risk

According to Alexander Titov, if China agrees to a deal with the United States, too large volumes of strategic reserves will not be put up for sale anyway. However, Washington's proposal, in a certain scenario, is not devoid of common sense.

“By the end of the first quarter of 2022, a surplus is expected in the global oil market, and fuel reserves will start to gradually grow after a drawdown this year. For this reason, it makes sense for China to sell part of its internal reserves now, lowering the exchange quotes, so that later on this wave, again, to build up strategic reserves. However, the deal between Beijing and Washington will not structurally change the resource quotes. Prices will not fall sharply downward; in the short term, quotations may fall by $ 2-5 per barrel,” the expert shared.