Page 66 - IFR Opportunities in Russian capital markets

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ifrintelligence reports/Opportunities in: Russian Capital Markets
Figure 3.10: Breakdown of worldwide oil & gas reserves, 2006 (%)
Share of worldwide oil reserves
Share of worldwide gas reserves
5.0% 9.5%
3.4% 8.5%
5.6%
6.2%
Source: BP statisical review of World energy
4.1% 8.0%
61.9%
40.1%
Middle East
Russia
Other Europe & Euasia South & Central America Asia Pacific
Africa
North America
8.3% 4.0%
8.9%
26.6%
The dangers from a fall in oil prices do not seem to be exorbitant, say analysts. Brent blend oil prices averaged US$67/bbl over 2006, but the consensus for 2007 is that prices will almost certainly fall. UBS has a long-term average price of US$41, while the Economic Development and Trade Ministry sees oil falling to US$58 in 2007 and declining to US$48 by 2009 (Figure 3.9).
An analysis of the likely development of oil prices in the next years is beyond the scope of this report, but most Russian analysts and the government are assuming that OPEC is striving to maintain a price floor of US$55/bbl.
High oil prices have had dramatic effects on share price performance, and while the relation between oil and the RTS is breaking down, if oil sticks to an average price of US$60/bbl, then UBS says the RTS could end 2007 at a stunning 3,200.
UBS said: "While we see the economy robust for all oil prices above US$40/bbl, with 75% of the market oil and gas stocks the price of oil is key. If it were to fall to US$40 or below, the market would hurt. If though something like our house US$67/bbl average occurs we could see long-term oil-price expectations rise. With US$60 long-term we see end-07 RTS fair value of 3,200."
The effect of falling oil prices has been diluted by the size of the economy and the diversification gains already made: in 1990s a US$1 fall in the price of oil would have shaved about 0.8–1% off GDP growth. Today, the same US$1 fall in oil prices cuts 0.2% off GDP growth, according to Fitch.
A fall to US$40 would be painful, but would not upset the apple cart and the RTS could still see some modest gains. Deutsche Bank UFG mapped out the effect of several oil price scenarios on the biggest stocks in its 2007 strategy, shown in Table 3.21.
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