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. Last Updated: 07/27/2016

Kudrin Predicts Oil Price Correction

ReutersKudrin predicts that a U.S. plan to drain liquidity will cause oil prices to fall.
Oil prices may start falling as soon as December as the U.S. government will drain liquidity from the financial market, Finance Minister Alexei Kudrin warned Thursday.

The prices shot from a low of $40 per barrel in December to about $70 now because the United States, like other governments around the world, flooded its economy with money to fight the recession, he said. This prompted speculators to invest more in commodities.

“It caused the prices to overheat,” he said during a discussion of next year’s federal budget in the Federation Council. “In three to six months, when the Federal Reserve begins to remove liquidity from the market … we will have a correction.”

The Federal Reserve will have to shrink the money supply because it is likely to see growing inflation as economic growth returns, Kudrin said.

Prices will slide to between $57 and $60 per barrel and stay at that level for the next three years, the minister predicted. They will further inch down to an inflation-adjusted $50 per barrel in 2013, he said.

The government is basing its budgets for the next two years on oil prices of $58 and $59, respectively, for Urals crude, Russia’s main export blend.

Urals stood at just over $70 per barrel in spot trading Thursday.

In mentioning the coming contraction of the U.S. money supply, Kudrin also appeared to refer to a speech that U.S. Treasury Secretary Timothy Geithner delivered last week to the Congressional panel overseeing the $700 billion Troubled Asset Relief Program.

“We must begin winding down some of the extraordinary support we put in place for the financial system,” Geithner said, without giving a timeline.

In a sign that the government backstops are on their way out, the Treasury’s loan program for money market mutual funds will not be extended when it ends Friday. At the end of the month, the Federal Deposit Insurance Corporation will either stop or drastically reduce its program to provide more than $300 billion in liquidity guarantees for bonds sold by financial institutions.

Even so, U.S. President Barack Obama’s $787 billion stimulus program will likely continue for much longer as it used just an estimated one-fifth of the money as of the end of last month.

Gazprom chief Alexei Miller voiced far more optimism about the oil price, saying last week that it would hit $100 as soon as next year.

The Organization of the Petroleum Exporting Countries will not let prices grow that high because it could stifle a budding economic recovery, said Alexei Kokin, an oil and gas analyst at Metropol. “I’m inclined to hold to Kudrin’s estimate,” he said.

Even if demand continues to rebound next year, as the International Energy Agency projected in its forecast last week, OPEC has sufficient resources to provide for the extra consumption, Kokin said.

Prices could slip from their current levels because of the reasons named by Kudrin and if demand climbs more slowly than expected, he said.

The International Energy Agency, an energy adviser to 28 developed countries, last week raised its demand forecast for next year by 1.7 percent, to 85.7 million barrels per day.