Russia Macro monthly report by Chris Weafer, Senior Partner at Macro-Advisory Ltd in Moscow
Are hopes for higher oil price wishful thinking or the new reality?
The World Energy Congress is currently taking place in Istanbul (10-13 October). President Putin is expected to attend the opening day session and is expected to give verbal support to the notion of an oil production freeze. This may provide some additional short-term oil price support. But Russia will not/cannot commit to a reduction in oil output. Neither will the Iranians and most other OPEC producers. That burden can only fall to the Saudi and, to a lesser extent, the UAE and Kuwait. In reality, the notion of a cut mostly shouldered by Saudi Arabia is a non-starter while a production freeze can, at best, only support the price of Brent at around US$50 per barrel. That is because any higher price will see the return of some of the 500,000 barrels of US shale oil which has been cut since late last year and make it easier for Iran to attract some of the billions of dollars it now needs to boost oil output further.
While officials from OPEC countries and other big non-OPEC producers will generally support the notion of production control, the more serious discussion will only occur at the next meeting of OPEC ministers in Vienna on 30 November.
While in Turkey, President Putin will also meet with President Erdogan and one of the topics on the agenda is the formal restoration of the Turk Stream gas pipeline. Putin very much wants this pipeline to go ahead. His view is that the combination of Nord Stream (1 and 2) plus a southern pipeline route will secure Russia’s position in the EU gas market long-term. The southern pipeline will also act as a deterrent against a future Iranian gas pipeline to the EU or at least delay it. Gas supplies from the Caspian or Central Asia are not a threat to Russia’s position.
Saudi will need to bear the brunt. Iran has made clear it will not agree to any cuts and Iraq continues to plea special status. Nigeria, Venezuela and Libya have already seen production drop.
Saudi budget would benefit from output cut. Saudi Arabia’s budget would actually benefit from cutting 600,000 barrels per day (the amount it added since 3Q15), with an average price of US$55 per barrel, as this would add US$14.5 bln to its budget over a full year. That average price would also boost Iranian oil revenue by US$9.5 bln over a full year and give Russia an extra US$28.5 bln.
Cutting production poses risks for Riyadh. Even if Saudi Arabia felt in a generous mood it would be taking a huge risk cutting production. With an average oil price of US$55 per barrel the decline in US shale would be halted and much of the 500,000 barrels of daily output lost in the US over the past year would start to return.
We forecast a range of US$45-55 p/bbl through the winter and a stable ruble. We reiterate our view that the price of Brent is more likely to trade between a low of US$45 per barrel and a high of US$55 per barrel through the winter months, albeit with short-lived spikes, and then to move to a higher average range from Q2 or Q3 next year.
- Russia would not join a production quota regime. This is partly because President Putin has consistently rejected such an idea, stating that Russia will never seek to influence the oil price but will continue to manage the results of oil price swings. Unlike OPEC producers, Russia’s biggest oil producers are listed companies with significant minority shareholder interests. None would voluntarily cut production and of course none will be asked to.
By Chris Weafer, Senior Partner, Macro-Advisory Ltd, Moscow
+ 7 916 349 2039