Russia seen extending production cuts to support price rally
MOSCOW (Bloomberg) -- Russia is likely to support extending a multinational deal to cut oil output as higher prices boost revenue in the run-up to next year’s presidential election, a Bloomberg survey shows.
“I expect Russia to be on board,” said Helima Croft, chief commodities strategist at RBC Capital Markets in New York. The Kremlin won’t want crude prices to fall, “especially with elections in 2018,” she said. Of 12 analysts surveyed, a further nine agreed.
Russian Energy Minister Alexander Novak will meet counterparts from OPEC in May to decide whether to prolong the curbs that began in January. Non-OPEC producer Oman said Thursday that Gulf Cooperation Council countries will push for an extension. Crude has rebounded about 15% since OPEC’s November decision to rein in supply, driving Russia’s revenue from energy taxes to a two-year high last quarter.
“The agreement on the whole has been working,” said Ildar Davletshin, an analyst at Renaissance Capital in London. “Russia’s reserves are picking up faster, increasing its economic resilience.”
Russia, which relies on oil and gas for about half its budget revenue, will go to the polls next March, and incumbent Vladimir Putin is widely expected to seek another term. Putin said last month the output accord with OPEC is stabilizing the market, though Novak has insisted it’s too early to decide whether to prolong it. His press office said Thursday the matter is still under discussion.
Russia’s oil producers would see no difficulty in keeping some of their aging wells offline until the end of the year, according to Moscow-based analysts at Otkritie Capital, Aton LLC and Sberbank CIB. Renewing the deal may help push prices up to $60/bbl, Otkritie’s Artem Konchin said. Brent is currently trading near $53.
A five-nation committee -- including Russia -- that assesses compliance with the cuts will meet Friday, and Novak plans to hold talks with Russian oil companies next week before meeting OPEC ministers in Vienna on May 25.
There are risks to extending the cuts. As OPEC and its allies have curtailed supply, U.S. shale drillers have seized the chance to ramp up output. That trend is the main threat to renewing the deal, Russian oil giant Rosneft PJSC said last month.
Russia has also not yet met its targets in the deal with OPEC. It’s pumping about 1.5 million tons a day, Deputy Energy Minister Kirill Molodtsov said this week. That’s equal to about 11 MMbbl, still exceeding the 10.947 MMbbl level it’s pledged to reach by the end of April.
“One-hundred percent compliance by Russia still remains very uncertain,” said Hans van Cleef, an energy economist at ABN Amro Bank in Amsterdam, who nonetheless sees the deal being extended.
Russian oil output rose to a post-Soviet record last October, and without a renewed deal, production could again increase. The Energy Ministry’s current outlook for 2017 supply, totaling 549 million tons, shows output in the second half could climb to an average of about 11.02 MMbpd.
Should OPEC decide to prolong production cuts for a further six months, Russia’s continued participation in the agreement will be crucial, said Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co.
Deputy Prime Minister Arkady Dvorkovich said April 7 that the deal hadn’t delivered the price boost Russia was expecting, though conceded that prices were now “at a more advantageous level” and “on the whole the decision taken was the right one.” Brent crude averaged about $55/bbl in the first quarter, up more than 50% from a year earlier.
Russia has secured a “strong price rise after a modest production cut,” said Giovanni Staunovo, a Zurich-based analyst at UBS Group AG. “Russia has been a big financial winner from the output reduction agreed last year."
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