- Putin wants stability and predictability in run-up to March 18, 2018 election
- Putin is expected to announce in September he will stand for a fourth term
- Best solution for Putin would be a new deal with Saudi Arabia
- Extension of output cut to end-2018 and small cut in fuel oil exports feasible
- Russia's crude oil and gas liquids output was 10.95 million boepd in July
Russian president Vladimir Putin will want to focus on the 2018 election
campaign, not on managing the oil markets. Photo: Shutterstock
By Nadia Kazakova
Oil market watchers are looking in the wrong direction for the path of oil prices over the next 12 months or so. The hard numbers — Opec and non-Opec compliance, US oil inventories, global growth — are all well and good, and they do serve their purpose.
But as we enter the pre-election period in Russia, it is the need for stability and predictability before the March 18, 2018 election that will drive president Vladimir Putin's decisions regarding Opec+ deal.
Putin is yet to announce his decision to run for a fourth term as president. The announcement is expected sometime in September, but the Russian media are doing their best to create a whiff of suspense around the decision as a proof that a real political process still exists in Russia.
For outside observers, however, it is fairly obvious that Putin has made up his mind. Media coverage of the president is wall-to-wall, he is visiting many parts of the country, and there is even an extra freshness and tautness to his facial features.
And Putin might want to focus on his re-election campaign rather than on firefighting any consequences of an abrupt end of the Opec+ deal. The best solution for the Russian president would be a new deal with Saudi Arabia, and not just an extension of the existing deal, but quite possibly an agreement on extra cuts in production and, for good measure, fuel oil exports by Russia.
A new deal with Russia would allow Saudi Arabia to press for better compliance from various Opec members. It would also be seen by the markets as making oil prices more predictable in the medium term, anchoring Brent crude at $50-$60/barrel. It would make future public shareholders in Saudi Aramco much more willing to invest in the giant company's forthcoming IPO.
For Russia, it would be a political rather than an economic decision. Various ministries and oil companies will be notionally consulted and would need to comply, regardless of local difficulties of doing so. Overall, an extension of the output cut until, say, the end 2018, and a gentle cut in exports — of fuel oil rather than of crude oil — should be manageable.
In July, Russia's crude oil and gas liquids output was 10.95 million barrels of oil equivalent per day (boepd), a slight increase from June and a more visible 0.91% increase year-on-year (+98,000 boepd in absolute terms). That is 280,000 boped below the peak output reached in October 2016.
Russian oil output and exports, million barrels of oil equivalent per day
Russian crude exports were up 2.9% y/y (+143,000 boepd) to 5.05 million boepd in July, but down some 76,000 from June this year. Not much of a surprise in any of the numbers.
Another set of statistics – possibly more interesting – are Russia's total oil exports. Russia is a significant exporter not only of crude oil, but of fuel oil, diesel and naphtha as well. So far this year, product exports were around half of the crude export levels, taking total oil exports to around 75% of Russian oil output.
Russian oil output and total oil and oil product exports, million tonnes
Source: www.customs.ru, author's estimates for June-July 2017
Note: Customs statistics differ from the energy ministry stats. Conversion factors used for metric tonne into barrels: 7.33 for crude oil, 8.5 for gasoline, 7.5 for diesel, 6.7 for fuel oil and 7.33 for other products.
Looking at the numbers, it seems that Russia can afford, as part of a hypothetical deal with Opec, to hold back some of the fuel oil exports, preferably during the winter months in Russia, when it could be used at power stations (instead of natural gas).
It might mean a drop in fuel oil prices domestically and some loss for the downstream sector in Russia, but it would be partly offset by higher oil prices (if all works well) and an outpouring of goodwill from the authorities (always useful).
And that would be a small price to pay for stability and predictability in the run-up to the election.
Oil terminal at Russian's eastern port of Vladivostok. Photo: Shutterstock
— Edited by John Acher