Oil Outpaces Ruble Giving Russian Drillers Cause for Cheer

(Bloomberg) -- Russia’s oil producers are enjoying near record crude prices -- in rubles -- and having 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. Here are the key trends to watch.

Party Like It’s 2014

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 program 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 AG said in a Jan. 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.

Upside Potential

Russia’s oil and gas index may gain another 20 to 30 percent this year as investors have yet to price in Brent at $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 Jan. 15 note. "Should the oil price stay at the current level, we will see a wave of earnings upgrades.”

Dividend Appeal

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

Risk of Headwinds

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 U.S. 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 materialize 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.

Capacity Limitations

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 Organization of Petroleum Exporting Countries. The nation’s spare production capacity doesn’t compare to that of OPEC, according to analysts at Aton LLC in Moscow and Rystad Energy AS in Oslo.

The U.S. 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.

--With assistance from Angelina Rascouet and Jack Farchy

To contact the reporters on this story: Dina Khrennikova in Moscow at dkhrennikova@bloomberg.net, Elena Mazneva in Moscow at emazneva@bloomberg.net.

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

©2018 Bloomberg L.P.