Kazakh Premier Says `Cheap' Oil Era May Last Five to Seven Years

  • Oil may fall to $20 in first half of 2016, Massimov says
  • Kazakh budget can withstand oil at as low as $16, premier says

Kazakh Prime Minister Karim Massimov said an “era of cheap oil” may last for five to seven years and the Central Asian republic is prepared for prices to drop to as low as $16 per barrel.

Oil may fall to $20 a barrel in the first half of 2016 before recovering to $30-$40 in the second half of the year, Massimov said Friday in an interview at the World Economic Forum in Davos, Switzerland. The budget, now based on oil at $40, will “most likely” be revised to reflect an average of $30 and it could withstand crude prices declining to $16, he said.

“My guess is we’ll be living in a cycle of quite low oil prices for a period of five to seven years,” Massimov said. “In general, we’ll live in an era of cheap oil.”

Kazakhstan, the second-largest energy producer in the former Soviet Union, is grappling with the consequences of a currency slump as tumbling crude prices and devaluations by neighboring Russia and China forced the central bank to shift to a floating exchange rate in August. The tenge has fallen by about 50 percent against the dollar since then. Kazakh businesses urged devaluation at the time as companies struggled amid a flood of cheaper Russian imports into the country, which is in a customs union with its larger neighbor.

Oil ‘Fever’

There’s a “speculative nature” to current crude prices that may become a “fever” driving oil to as low as $20 in coming months, Massimov said. Kazakhstan may have to review some infrastructure projects as a result, though such price shocks offer “a good opportunity for structural reforms” to diversify the economy, he said.

“I think this is the ideal time for reform,” Massimov said.

The “financial system is stable,” while “probably some sort of assistance to the banking system from the point of view of providing liquidity will be necessary” to enable businesses to take loans, Massimov said.

Growth in gross domestic product “will hover at around zero” with crude at $30, the premier said.

The tenge strengthened 1 percent to 381.27 per dollar at 4:29 p.m. in Astana as oil rallied in its biggest two-day advance since August. The Kazakh currency’s decline since the free-float spurred annual inflation to 13.6 percent in December.

The falling price of oil, which accounts for more than 50 percent of the state’s budget revenue, according to Standard & Poors, is prompting the government to assess its plans, which were based on a projected $40 for 2016.

Adjust Budget

“In principle, the budget can balance at $16 a barrel, though of course some programs would have to be adjusted,” he said.

President Nursultan Nazarbayev dissolved parliament on Jan. 20 and set pre-term elections for March 20, after lawmakers said in a statement that “there’s a need for social consolidation at this critical time for effectively implementing anti-crisis measures.”

Nazarbayev, in power for more than a quarter century, warned in October that a “real crisis is coming” and told the government to prepare for “a decline in our companies’ profits, a drop in incomes and the possibility of job cuts.”

While he called in November for annual economic growth of 5 percent in the next 10 years, the increase in Kazakhstan’s GDP slowed to 1.2 percent in 2015. The national oil fund slumped 13 percent to $63.5 billion and the central bank’s reserves dropped 3.9 percent to $28 billion in 2015, according to the regulator’s data.

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