Russia questions OPEC breakthrough, keeps budget bet on $40 oil

By Olga Tanas on 9/30/2016

SOCHI, Russia (Bloomberg) -- Russia is sticking with an assumption that oil will average $40/bbl in the next three years and won’t take a bait by revising its budget outlook after a preliminary agreement by OPEC on its first production cut in eight years, according to Finance Minister Anton Siluanov.

While crude is trading near $50 after Wednesday’s announcement, heading for the first September increase since 2010, “we know prices are adjusted after such statements,” Siluanov told reporters in Russia’s Black Sea resort of Sochi. The price of Russia’s main export blend Urals used to calculate the country’s budget “was and remains” at $40/bbl, he said.

“You think it’s stabilized?” Siluanov said. “We need to see how realistically the decisions will be implemented.”

Although the world’s biggest energy exporter has signaled it’s willing to join efforts with OPEC to control global supply, it’s on course to pump oil at a post-Soviet record in September, adding as much as 400,000 bpd to the country’s output. The surprise deal, which will see the Organization of Petroleum Exporting Countries reduce production to a range of 32.5 MMbpd to 33 MMbpd, sent oil surging more than 5%.

The market was caught by surprise after Saudi Arabia and Iran had signaled before the meeting that an accord was unlikely. OPEC now faces the challenge of implementing the cuts, with Goldman Sachs Group Inc. and Morgan Stanley expressing skepticism that it can be completed. Prices may struggle to hold above $40/bbl unless OPEC acts, Citigroup Inc. predicts.

Already running its widest deficit since 2010 this year after oil’s collapse, Russia is preparing its budget for the next three years. The Finance Ministry has proposed a fiscal gap of 3.2% of gross domestic product in 2017. It then plans to reduce the shortfall by one percentage point each year to balance the budget by 2020.

The deficit will be wider this year than earlier forecast and may increase to as much as 3.7% of GDP, beyond the earlier estimate of 3.2%, according to Siluanov.

Should oil trade above $40, “we’ll spend less from reserves -- that’s our approach,” Siluanov said. “On the other hand, output limits aren’t the only factor that affects the price of oil. There’s also the issue of global demand, how the world economy will develop -- that will also affect pricing.”

Another question is how the U.S. shale industry will react, according to Siluanov.

“That’s also a large supply volume, because shale projects very quickly get turned around,” he said. “Which is why we can see additional supply on the oil market.”

Brent crude, which is used to price Urals, dropped as much as 90 cents to $48.34/bbl on the London-based ICE Futures Europe exchange. Prices are up 2.9% this month and down 2.6% for the quarter. The price of oil in rubles is at 3,077, compared with the level of 3,165 which Russia used as a basis for this year’s budget.

Oil will need to hold above $50/bbl for months before U.S. companies commit to more spending, according to analysts at firms including S&P Global Platts and Oppenheimer & Co. The number of rigs targeting oil in the U.S. climbed to 418 in the week ended Sept. 23, the highest level since February, according to data from Baker Hughes Inc.

Budget rule

While keeping its fiscal policy tight, Russia has also been revisiting a mechanism suspended this year that capped spending based on a backward-looking average for oil. The so-called budget rule, which would prevent the government from spending surplus revenue above a pre-set oil price, aims to insulate the economy from the ups and downs in crude and shield the exchange rate by withdrawing all additional income into reserves. Siluanov said last week that the price of oil for the policy should also be set at $40/bbl.

“At higher oil prices, we’ll see a stronger exchange rate,” Siluanov said. “We shouldn’t make the budget dependent on external conditions and risks linked to them.”

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