THE GREAT DROUGHT

The New Year festivities had not even ended before the stock market reports served up their own "gift" and by no means a good one. The anticipated Chinese stock market crash turned into a collapse and brought in its wake the stock market indices throughout the world, concomitantly seizing upon the downward trend in oil prices.

Already in the early days of the New Year, 2016, the stocks' indices on the two major stock exchanges in China, the Shanghai and the Shenzhen stock exchanges had slumped. As a result of this major crash, the stock exchanges had to stop work twice. The Chinese government's decision to devalue the yuan within a margin of 1.5 per cent to a level of 6.5 yuan to the US dollar primarily had an impact on the crash. In total, the Chinese currency has lost more than five per cent of its value over the last six months. Although the Chinese government has taken measures to stabilise the situation and uphold the yuan exchange rate, it did not manage to avert the record slump. According to the results for 2015, China's gold and currency reserves have decreased by 500bn dollars to 3.3 trillion dollars. This is moreover the first time there has been a drop in reserves since 1992 which indicates a tendency towards an outflow of capital. 

The macro-economic statistics from China for the results of 2015 were not very cheering either. The country's GDP only grew by 6.9-7 per cent, which is an all-time low over the last 20 years.

This points to the fact that the Chinese economy is undergoing far from simple periods of transformation from a production economy based on investments to a consumer economy. In the current year the Chinese GDP growth rates will decline even further. According to official forecasts the growth in GDP will be 6.7 per cent, but, according to independent financial institutions, it will be 6.3-6.5 per cent.

All these deviations are having a negative impact on the world economy. It is no secret that it was China that has been the locomotive of world economic growth over the last decade. As a result, in its volume of GDP the ""Heavenly Kingdom" has risen from 10th place in the world in 1990 to second place where it has been ensconced since 2009. 

The crash on the Chinese stock markets has had an impact on practically all the world's stock exchanges, beginning with the Asian markets, including Japan, and ending with Europe, North and South America and Russia.

The biggest drop in indices was observed on the American stock exchanges. At the beginning of the year, for example, the Dow Jones index fell to an all-time low for the last 119 years, slumping more than 5 per cent. The index lost 911 points, which is the worst figure since 1897. The NASDAQ index collapsed by 6 per cent, which was an all-time low for the last 16 years, since the year 2000.

 In actual fact, the USA itself acted as the catalyst for the Chinese stock exchanges' crash and the outflow of capital. The Federal Reserve's decision in December to raise the key rate and the forecast that there would be a continuing growth trend in the next three years signified that there would be a tendency for an outflow of capital from developing markets, one of which is China. As a result, in 2015 the outflow of capital from China was already almost 900bn dollars. Besides this, the American economy's bright prospects are strengthening the dollar, which is having a negative effect on financial and stock markets. But not on them alone. Another victim of the slowdown in the Chinese economy was oil prices. The price of "black gold" has fallen to a level of less than 30 dollars per barrel.

Oil prices cannot be considered to have bottomed out yet either. Back in September 2015, those in many financial and experts' circles who predicted a rise in oil prices, albeit a slight one, and stabilisation of these prices at more than 50 dollars per barrel have been changing their forecasts since the beginning of the year. On average in 2016 the new price level is being forecast as around 40 dollars per barrel and 50 dollars per barrel only in 2017. Barclays, Bank of America Merrill Lynch, Society Generale. Morgan Stanley, Goldman Sachs, Citigroup and the US Energy Information Administration (EIA) back this scenario. None of them do moreover dismiss the likelihood of oil prices falling to 15-20 dollars per barrel either. The most pessimistic scenario was offered by the British bank Standard Chartered, which thinks that oil prices will fall to 10 dollars per barrel.

The main factor in the drop in prices still remains excessive oil production with oil supplies on the market exceeding demand by 1.5-2m barrels per day. In this connection, the markets are anticipating a fall in oil consumption in China as well, owing to the slowdown in economic growth. But for the moment these expectations are far from what is really happening. China increased oil imports by 8.8 per cent to a record high of 334m tonnes in 2015. This year imports may rise even further to 370m tonnes.

But the suppliers are not lagging behind the consumers. Saudi Arabia and Russia, the world's major oil producers, not only have no intention of cutting output, but are actively boosting it. According to the results for 2015, the Russian Federation, for example, has produced a record output of 534m tonnes of oil. Oil exports have increased to 10 per cent, to 220.3m tonnes.

Moreover, the deterioration in relations between Saudi Arabia and Iran owing to Riyadh's execution of the Shia cleric Nimr al-Nimr and the attacks on Saudi Arabia's embassy in the Islamic Republic of Iran have not had any effect on oil prices.

The conflict between the owners of the major oil reserves would apparently have spurred a growth in prices, but the stock exchanges only responded with a slight rise for a few hours during the most acute phase in the conflict. Then the downturn in oil prices continued. This conflict ultimately had an opposite effect on the oil markets. This month Iran will already gain the right to boost its oil exports owing to the IAEA [International Atomic Ener-gy Agency] report confirming that Tehran had met all the conditions relating to the nuclear deal. So, the sanctions on Iran will largely be lifted, it will gain access to its frozen assets and, what is most important, it will be allowed to boost its oil exports to 500,000 barrels per day in the very near future.

Saudi Arabia was precisely the one to occupy Iran's niche in OPEC after sanctions were imposed on oil exports by the USA and Europe. Now it would appear to be payback time, considering that both states are members of the cartel. But the situation is developing in such a way that nobody is going to observe any kinds of quotas, even formally, and Iran will also join the price war on the oil market. OPEC has already fully acknowledged its inability to regulate the market, and the intensification of the Saudi-Iranian confrontation may ultimately cause the organisation to fall apart altogether. But for the moment the cartel is trying to react to the processes somehow, voicing optimistic predictions about a growth in consumption.

According to United Arab Emirates' Energy Minister Suhail Mohamed Faraj Al-Mazrouel, the OPEC strategy is working successfully, since a drastic cut in output is being observed outside the countries in the cartel. True, it is not clear where the minister has seen this reduction, if Russia is reporting a record high in oil output. Oil production in the USA has declined relatively, but the rate of the cuts there is by no means so high, a maximum of 9,6m barrels per day in May 2015 to 9.1m barrels in November. In December moreover oil output rose again to 9.2m barrels, which is connected with the ban on oil exports being lifted.

The UAE minister thereby forecasts a growth in oil consumption of 1-1.5m barrels per day in 2015. Taking into account the drastic drop in oil quotations, OPEC has announced an extraordinary summit of the cartel in March 2016. Until that time the organisation is attempting to come to an agreement with the producers outside the cartel on a joint cut in production. But there are not that many chances of coming to an agreement, considering the geopolitical differences among the main players. It should moreover be taken into account that the main right to vote in the cartel remains that of Saudi Arabia, which has extensive opportunities both to cut production and also to boost it. For the moment, the Kingdom has no intention of giving up its share of the market, attempting concomitantly to even expand the geography of its supplies.

So, it is not worth expecting anything extraordinary to come out of the cartel's March conference. It is hardly likely that OPEC will able to bring back the previous quotas that were rejected in December, not to mention the opportunities for cutting production. In circumstances where the main players are not willing to compromise, oil will continue to fall in price, unless of course there Is any kind of large scale war between the main oil producers or there is another factor capable of drastically lowering the volume of supplies on the market. But for the moment such prerequisites do not exist.

Naturally, the low prices are leading to a reduction in investments in the sector, which will have an impact on production for two to three years to come. Not until the end of the current decade will we be able to witness a tendency for oil prices to rise. On the other hand, the low oil prices are activating economic development in countries consuming energy resources. But considerable growth also requires time, and, in the present conditions, in spite of the low prices, we are seeing a decline in growth rates in China and somewhat unstable growth in Europe. The USA is a case all of its own. On the other side of the ocean the economy is on the up and the dollar is growing ever stronger against the backdrop of other currencies, concomitantly contributing its mite to the drop in quotations on the oil market.

In principle, the oil producing countries can gain some advantage from this situation. The present crisis reveals the importance of reshaping and diversifying the economy. Under-standably, it is even more difficult to carry out reforms and develop other sectors in conditions when oil incomes are down, especially in conditions were there is insufficient funding. But is vitally necessary to do that. You see, no matter how much the oil prices rise, most experts advise forgetting about prices around 100 dollars per barrel and above. Now optimistic forecasts envisage figures like 60-80 dollars per barrel being attained. But for the moment we have to become accustomed to living within our means.