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Abu Dhabi, UAEWednesday 20 June 2018

Russia's producers benefit from two-year high oil prices

The price of the benchmark crude in rubles is close to a record thanks to a weaker currency

Alexander Novak, Russia's energy minister, left, alongside Khalid Al Falih, Saudi Arabia's energy and industry minister in Vienna last November. Russia is compliant with Opec production cuts that aided the recovery of oil prices. Akos Stiller/Bloomberg
Alexander Novak, Russia's energy minister, left, alongside Khalid Al Falih, Saudi Arabia's energy and industry minister in Vienna last November. Russia is compliant with Opec production cuts that aided the recovery of oil prices. Akos Stiller/Bloomberg

Russia’s oil producers are enjoying near record crude prices in rubles, their best start to the year since 2015. As the nation prepares to discuss its deal with Opec allies in Oman this weekend, analysts say the good times will continue.

For the global market, Brent is still $50 below the high of 2014, yet for Russian producers the price of the benchmark crude in rubles is close to a record thanks to a weaker currency. A new government programme of foreign-currency purchases is expected to limit the upward potential for the ruble this year, and in the coming weeks even trigger its temporary weakness, analysts at UBS Group said in a January 11 report.

While the nation’s finance minister Anton Siluanov said this week that Russia won’t allow the exchange rate to strengthen too sharply, central bank governor Elvira Nabiullina warned against “euphoria” from high oil prices.

Russia’s oil and gas index may gain another 20 to 30 per cent this year as investors have yet to price in Brent at US$70 per barrel, according to Sberbank CIB. "The sell side is assuming an average oil price of $55 per barrel for 2018,” the bank’s analysts said in a January 15 note. "Should the oil price stay at the current level, we will see a wave of earnings upgrades.”

The appeal of Russian oil and gas shares has increased, relative to European rivals, since the beginning of the year. Citigroup said 2018 is set to become the second “year of the dividend” for Russian stocks amid improved earnings outlooks.

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While an investor favorite, Russia’s oil and gas industry still faces the risk of headwinds. The first may blow at the end of January, should the US Treasury publish a report on potential new sanctions against Russia. However, the risk of a tougher stance on the Russian economy and companies is low, according to a Bank of America Merrill Lynch report.

Other potential risks include oil and ruble volatility, plus the imposition of a higher tax burden on Russian producers, according to Citigroup. The fiscal threat may materialise after presidential elections in March as the Kremlin mulls boosting spending on health, education and infrastructure. The energy industry is the traditional cash cow for such budget splurges.

Russian producers are also less well placed than their Arabian Gulf allies to take advantage of a gradual exit from the oil output curbs agreed with the Organisation of Petroleum Exporting Countries. The nation’s spare production capacity doesn’t compare to that of Opec, according to analysts at Aton in Moscow and Rystad Energy in Oslo.

The US Energy Information Administration estimates that Opec's spare capacity -- production that can be brought online within 30 days and sustained for at least 90 days -- stood at 2.11 million barrels a day in the fourth quarter, all in the Middle East. The International Energy Agency had a higher figure -- 3.41 million barrels a day as of November.

Russia, which agreed to cut production to 10.95 million barrels from a post-Soviet high of 11.25 million barrels in October 2016, has less immediate firepower at its disposal.

Russia could increase output to about 11.1 million barrels a day within a month of the curbs being lifted and ramp up production to pre-cut levels within an additional two to three months, said Rystad analyst Veronika Akulinitseva. BMI Research has a similar estimate -- some 310,000 barrels a day that could be brought to the market within six months.

To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net, Dylan Griffiths, Rakteem Katakey

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