How Can The Crude Oil Production Cut Impact Russian Monetary Policy?

Revenue from crude oil matters a lot to Russia

In the previous article, we noted that Russia is expected to reduce its crude oil output by 300,000 barrels a day. This is expected to impact Russian companies like LUKOIL PJSC (LUKOY), Rosneft PJSC (OJSCY), and Gazprom PJSC (OGZPY).

Brent crude oil prices are considered a benchmark for Russia’s oil exports. It is estimated that oil and gas exports contribute one-third of Russia’s budget revenue. Given this reliance on oil exports, it’s not surprising that energy prices are major drivers of Russian equities. The graph below shows the movement of Brent oil prices in 2016.

After having seen a low of $26 a barrel earlier in the year, prices have been over the $50 a barrel mark throughout December. This has resulted into a surge in Russian equities (RBL).

- Advertisement -

Outlining the country’s support to the credo oil production cut, Russia’s Energy Minister Alexander Novak has told Bloomberg that the first stage of reduction in production will be seen in early January. He added that “Our companies are well aware that such agreements are there in place, and they are voluntarily willing to participate in this because they definitely see benefits for themselves.”

Bank of Russia weighs-in

In the summary of its December monetary policy report, the Bank of Russia noted that the crude oil production cut is expected to raise the chances of higher prices in the short-term as compared to those anticipated in the baseline scenario. The baseline scenario of the Bank of Russia assumes prices at $40 a barrel. Hence, if prices remain at the present level, Russia will not be discomforted.

However, the central bank was quick to point out that excess supply can still result, thus driving prices down. It noted the following factors as having the potential to push supply back up:

  • Enhance flexibility of oil supply (including non-conventional sources)
  • High oil inventories
  • Slow growth of the global economy

Apart from talking about crude oil prices, the country’s central bank also provided its projections for various economic indicators. Let’s look at them in the next article.

- Advertisement -