Russia Looks to Shore Up New Role as Oil Heavyweight

By Anonymous

MOSCOW—Russia’s oil minister flies to Algiers this weekend to meet with Saudi and OPEC counterparts—a gathering oil traders are watching closely and one that could help solidify Russia’s new status as oil-market kingpin.

Since joining forces two years ago with Saudi Arabia and other members of the Organization of the Petroleum Exporting Countries, Russia has helped the group re-establish its once-powerful hold on global oil prices.

The cartel for decades has raised or lowered output to balance supply and demand, and support prices.

That hold was challenged several years ago, when U.S. shale flooded global markets, sending prices hurtling. OPEC, which pumps more than one of every three barrels the world consumes, appeared powerless to lift markets. That is, until it enlisted Russia and a group of non-OPEC producers including Azerbaijan and Mexico to join in output cuts two years ago.

“It has been a surprise to see Russia up there, shaping the oil markets, but changing times are resulting in new alliances and new leaders,” said Andrew Lipow, a veteran oil analyst in Houston. “The Russians are using their diplomacy and their swing production capacity to keep prices high.”

In June, the same group opened up the spigot again, adding production to keep prices from getting too high. Russia took on a key negotiating role across from Saudi Arabia. Of the 600,000 barrels a day of new crude that OPEC and the Russia-led group agreed to pump, about 200,000 barrels has come from Russia.

That Russia was so quickly able to add production—and theoretically shut it all off again—lifts Moscow’s credibility as a global oil markets heavyweight, a role it hasn’t held for decades. Saudi Arabia, which exports far more than any other country, is still essentially the central bank of oil, but Russian oil policy now matters to the rest of the world.

Russia’s new production and rising prices have been good for its economy and President Vladimir Putin, who often touts Russia’s new records in oil production. Driven by the oil equities, Moscow’s stock exchange rose to an all-time high Tuesday, despite a weakening currency and slowing economic growth. Russia’s oil and gas revenue provides about 40% of the national budget. In August, it rose to 5.5 trillion rubles ($83 billion), up nearly 50% from the same period a year ago.

The government has plowed the oil windfall into reserves to boost defenses against fresh Western sanctions and financial market volatility. These new oil reserves have spared Russia from the worst of the turmoil ripping through emerging markets around the world.

Depreciating currency and rising output have flooded Russian oil companies with record ruble revenues, boosting share prices and long-term production potential. Russia’s energy stocks are up 37% this year, according to the Moscow Stock Exchange. In contrast, companies tied to the real economy, such as banks and supermarkets, have experienced near-double-digit declines.

“The financial fundamentals of Russian oil companies right now are some of the best on record,” said Ildar Davletshin, an energy equity analyst at Wood & Co. in London. “They would love to see even bigger production quotas, to take even greater share of the falling Venezuelan and Iranian output.”

The bonanza may not last long, as the Kremlin is bound to seek a bigger share of the oil windfall from the companies as the country continues to face pressure from sanctions, said Mr. Davletshin.

For now, Russian oil firms have used the extra rubles to raise dividend guidance, buy back stock and plan gradual increases in capital spending, mostly to upgrade refineries and search for new deposits.

With the new OPEC meeting approaching, Russia’s energy minister, Alexander Novak, indicated he would like things to stay just the way they are. In the past few weeks he has said Russia is satisfied with the current prices and its production quota.

“The price objectively reflects the situation in the market,” Mr. Novak told journalists last week. “We see that the crisis period caused by the fall in prices has been overcome.”

Write to Anatoly Kurmanaev at [email protected]