Oil prices collapsed, as well as the Russian rouble. If we take a look at how the rouble traded yesterday, we can see that the opening price was much lower. Thus, the rouble strengthened from yesterday's quotes. Moreover, oil prices are plunging. At the moment, Brent crude is trading lower than $40 per barrel. According to speculators, the rouble depends greatly on oil prices meaning that the currency is likely to drop. However, the rouble fell only by 5.0% from Friday while oil plunged by more than 20%. As a result, we can see that the currency does not depend on oil entirely.
The current situation makes it clear that Russia definitely knows how to wage trade wars. In fact, Russia's decision to withdraw from the agreement to cut oil production has negative impact on American companies, which produce shale oil and gas, in the first place. Usually, American companies sell their products in the spot market which means that a seller and a buyer make contracts for express goods delivery and at the current market price. Consequently, if market prices collapse unexpectedly, sellers are likely to suffer serious losses. Another important aspect is that all these companies are indebted while their production costs and planned supply volumes serve as loan guarantee. Thus, if oil prices slump, banks have to demand early repayment of part of the debt. Such companies can make profit only from sales in the spot market. So, when prices drop, they do not know where to find money to fulfill banks' requirements. In other words, such a situation can cause mass bankruptcy among small companies. Moreover, production is likely to decrease significantly. Currently, the US produces more oil than Russia or Saudi Arabia. However, it hurts neither Russia nor Saudi Arabia. The thing is, these two countries prefer long-term contracts with specified volume of supply. Prices in such contracts are set nearly a year in advance. Thus, it does not matter what happens with oil prices in a short term. A buyer signs the contract as well and is supposed to follow its terms and conditions. As a result, the US is likely to be the one to suffer. Russia or Saudi Arabia can face losses only if prices remain low for a long time. In such a case, the countries are likely to make contracts at lower prices, which are closer to production costs. Moreover, both Russia and Saudi Arabia have vast foreign exchange reserves. The countries can simply wait for all other oil producers to be out of business. For better understanding, let's take a look at the reserves of Russia's Central Bank which amount to 570.4 billion dollars while the country's imports was only 254.1 billion in 2019. Saudi Arabia's reserves worth some 501.3 billion dollars. The country's imports in 3Q of 2019 amounted to 99.0 billion dollars. Thus, imports are unlikely to exceed 140.0 billion dollars for the entire year. Both Russia and Saudi Arabia have enough reserves to wait for their counterparts to go bankrupt. Simply said, this is clearly not a way of driving competitors out of the market. Moreover, Russia and Saudi Arabia are likely to increase their share in the global oil market. Russia is artificially manipulating the market pursuing its own benefit. Anyway, it is the essence of all trade wars and Russia only shows that it knows how to play the game.
Anyway, the rouble fell and collapsed oil prices are likely to prevent the currency from strengthening. Thus, the dollar is expected to consolidate in the range of 71.50-72.00 rubles. There is possibility that the price can rise even further. However, it is a temporary event. In the midterm, the dollar is likely to cost 69.75 roubles.
