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Russian oil may gain a lot by giving a little on OPEC U-Turn

November 08, 2018/ 12:12

Moscow. Russia’s oil industry is feeling the pressure of a possible return of production caps. In fact, by sacrificing a fraction of output, the companies could see their stocks rise.

Fresh output curbs may push crude prices up, benefiting Russian producers just as they did during the cuts that began last year. The Moscow Oil & Gas Index has gained more than 36 percent since the initial output pact between OPEC and Russia was reached almost two years ago, reports Bloomberg.

The Organization of Petroleum Exporting Countries has signaled it will consider a return to cutting supply next year as oil prices wilt in the face of another surge in U.S. shale production. Russian oil bosses will now meet with Energy Minister Alexander Novak on Thursday to share their views as they put together investment plans for next year, according to people familiar with the matter.

“History shows that we are able to turn production cuts to our advantage,” said Alexander Kornilov, an Aton LLC analyst in Moscow. “If we look at how the Russian oil and gas index has moved since 2016 -- when the country first agreed on production cuts with OPEC -- everything becomes clear.”

On Monday, Novak and Saudi Energy Minister Khalid Al-Falih discussed the agenda of a meeting scheduled for this weekend between OPEC and its allies in Abu Dhabi, an official familiar with the matter said. While there’s been talk that the group will consider renewed supply curbs, Russia isn’t yet ready to take such a decision, the official said.

Any OPEC+ agreement that can stabilize crude prices above current levels will benefit Russian oil companies, according to Alexander Losev, chief executive officer of Sputnik Asset Management.

“Producing less at $80 per barrel is better than producing at current levels and at $70 per barrel,” he said. “A certain output decline will also help the companies to reduce operating costs and further improve their financials, including free cash flow.”

Russian crude production has risen to a post-Soviet record of 11.4 million barrels a day following the country’s June agreement with OPEC to ease output caps. The hike was driven mainly by state oil giant Rosneft PJSC, which this week said its production might increase by a further 4 percent in 2019.

With regard to the extent of any new output caps, “I believe they wouldn’t be that significant,” Raiffeisen Centrobank analyst Andrey Polischuk said, adding that next year would be no worse than 2018. “The reality may turn out not so grim for Russian big oil.”

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