Russia’s central bank issued a warning to the government that oil prices could enter a prolonged slump on the back of higher U.S. and non-OPEC production this year. The warning came earlier this year and was quite likely linked to the multiple forecasts anticipating just such a development. These forecasts, however, are unlikely to prove true, as signaled by the U.S. oil industry itself.
Reuters reported the news about the Central Bank of Russia earlier in the week, saying the warning was included in a presentation that Prime Minister Mikhail Mishustin had prepared for a cabinet discussion. “A significant risk is the oil price,” Reuters cited one slide from the presentation as saying “a significant increase in production in the United States and outside OPEC.”
It is quite unsurprising to get such a warning from a central bank that, like other state financial institutions, quite unsurprisingly follows commodity market forecasts. Such behavior is even less surprising from the central bank of one of the world’s largest oil producers. Moreover, Russian budget drafters tend to be conservative in their oil price estimates traditionally, so the central bank is likely to also err on the side of caution. In fact, the bank forecast the average price of Brent crude this year at $60 per barrel in a recent update. That’s down from $68 per barrel for 2024 and $60 for both 2026 and 2027.
However, all these bearish forecasts hinge on the materialization of significant production growth outside of OPEC, especially in the United States. President Trump wants it—but oil executives don’t. Trump has campaigned for cheap energy at home and energy dominance abroad, but these targets are at odds with the priorities of the oil industry, the top of which is making money for shareholders. This would be harder in a lower oil prices environment, and the executives have not tried to conceal that.
Confirming this sentiment, the latest Dallas Fed Energy Survey cited industry executives as saying that oil producers had little motivation to spend more on production ramp up and that some would even reduce output should oil fall further. The survey’s comments section featured feedback such as “There cannot be “U.S. energy dominance" and $50 per barrel oil; those two statements are contradictory” and “Oil prices have decreased while operating costs have continued to increase. To stimulate new activity, oil prices need to be in the $75-$80 per barrel range,” as well as “‘Drill, baby, drill’” is nothing short of a myth and populist rallying cry.”
These comments, which come in the company of executives complaining about the heightened uncertainty in the energy space due to Trump’s tariff push, suggest strongly that there will be no major additions to U.S. oil production this year at the current level of oil prices. Yet price movements from the past two years have shown that traders don’t need actual supply changes—or the absence of such changes—to shift from bearish to bullish in a blink. All they have needed is the perception of too much or too little supply. This means that price volatility will remain greater than what it used to be in pre-algo trading times, with considerable downward risk based on supply perceptions.
As regards Russia specifically, it is in a delicate position because any talk of sanction lifting will pummel oil prices, which would be a disadvantage to Russian producers. The effect might be transitory, until the market calms down that Russia will not be flooding the world with oil, but for now, it seems that, quite ironically, sanctions are better for Russian oil prices—and U.S. oil prices, too.
By Irina Slav for Oilprice.com
