RUSSIA'S UPSIDE POTENTIAL
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.
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."
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 the 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 corporate sector 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.
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.
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U.S. FRB - Industrial production edged up 0.1 percent in July after rising at an average pace of 0.5 percent over the previous five months. Manufacturing production increased 0.3 percent, the output of utilities moved down 0.5 percent, and, after posting five consecutive months of growth, the index for mining declined 0.3 percent. At 108.0 percent of its 2012 average, total industrial production was 4.2 percent higher in July than it was a year earlier. Capacity utilization for the industrial sector was unchanged in July at 78.1 percent, a rate that is 1.7 percentage points below its long-run (1972–2017) average.
NPD - Preliminary production figures for July 2018 show an average daily production of 1 911 000 barrels of oil, NGL and condensate, which is an increase of 64 000 barrels per day compared to June.
GAZPROM NEFT - For the first six months of 2018 Gazprom Neft achieved revenue** growth of 24.4% year-on-year, at one trillion, 137.7 billion rubles (RUB1,137,700,000,000). The Company achieved a 49.8% year-on-year increase in adjusted EBITDA, to RUB368.2 billion. This performance reflected positive market conditions for oil and oil products, production growth at the Company’s new projects, and effective management initiatives. Net profit attributable to Gazprom Neft PJSC shareholders grew 49.6% year on year, to RUB166.4 billion. Growth in the Company’s operating cash flow, as well as the completion of key infrastructure investments at new upstream projects, delivered positive free cash flow of RUB47.5 billion for 1H 2018.
REUTERS - Front-month Brent crude oil futures LCOc1 were at $72.34 per barrel at 0648 GMT, down by 12 cents, or 0.2 percent, from their last close. U.S. West Texas Intermediate (WTI) crude futures CLc1 were down 23 cents, or 0.3 percent, at $66.81 per barrel.