Crude oil has been fanning the rise in Russian equities
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 along with prominent broad-based Russia-focused ETFs.
The rise in oil prices have led to gains in energy companies like LUKOIL PJSC (LUKOY), Rosneft PJSC (OJSCY), and Gazprom PJSC (OGZPY). Apart from helping the energy sector, the rise in Brent crude oil prices, along with that in commodities prices, has also helped the materials sector.
Will the oil production cut hurt Russia-focused ETFs?
Crude oil production in Russia had averaged 11.24 million barrels a day in October 2016 – a post-Soviet-era record. However, the OPEC (Organization of the Petroleum Exporting Countries) decided to cut crude oil production recently and 11 non-OPEC nations agreed to reduce production by 558,000 barrels per day. Of this, Russia is expected to reduce its production by 300,000 barrels a day. This can eat into oil companies’ revenues and hurt the stock market in general.
However, Russia’s Energy Minister Alexander Novak sounded positive on the pact. Informing that the first stage of reduction in production will be seen in early January, he said to Bloomberg 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.”
According to him Russia’s budget is pinned on a per barrel price of $40. Hence, if the price range remains between $50 and $60, Russia will remain comfortable.
Iran opportunity awaiting?
With the sanctions on Iran being partially lifted, Russian companies have signed agreements across sectors, which could led to business worth billions of dollars. Gazprom, its subsidiary Gazprom Neft (GZPFY), LUKOIL, and Zarubezhneft OAO have already signed a memorandum of understanding with Iran.
Iran has an exemption on the aforementioned crude oil production cut; it has been allowed to increase output by 90,000 barrels per day to 3.8 million barrels a day. This fact, along with Russian companies being less constrained by the remaining sanctions on Iran could translate into big business for Russia.
Though Russian equities may find a way to deal with the crude oil production cut, there’s another aspect which is murkier. Let’s look at that in the next article.