Russia is Being Forced to Get off the Oil Needle

Russia is Being Forced to Get off the Oil Needle


Oil exports from Russia dropped in early 2020. Although the rate of decline remains insignificant, the damage to the Russian oil industry stemming from the fall in "black gold" prices in early 2020 is yet to be calculated. Nonetheless, it is already clear that it is difficult to avoid the decline in oil export revenues in the first quarter of the year. As well as the budget losses, of course.

In January 2020, oil exports from Russia amounted to 21.7 million tonnes. This is 1.8% less than in the same time period a year ago. According to TASS that cited the materials of the central dispatching office at the Central Control Administration of the Fuel and Energy Complex, this is primarily due to a decrease in supplies of raw materials to the neighboring countries. The relevant indicator fell by 73.7% which is to 0.4 million tonnes.

The transit of oil dropped by 3% to 1.63 million tonnes, while in January, 25.142 million tonnes of oil was delivered to the domestic market, which is 0.5% less than the year before. At the same time, in January, Russian oil supplies to non-CIS countries increased by 3.6% to 21.3 million tonnes. Alexey Kiriyenko, executive partner of EXANTE indicates that in fact, oil exports have shrunk in terms of volume. It was caused by the observance of promises under the OPEC+ agreement.

At the same time, according to Kiriyenko's estimates, in monetary terms, exports fell even more -- about 8%. Against this background, consumption in the domestic market is stagnating along with overall demand and sluggish economic growth.

Thus, budget losses from oil exports are already evident. Especially since in early February the world markets were affected by large-scale sales, which had an extremely negative impact, including the raw materials segment. By the way, Alexey Kudrin, the head of the Accounts Chamber, agreed with that – he posted on his Twitter that "in the first quarter, Russia's decline in revenues from oil exports is almost inevitable. This is due to the spread of the new coronavirus.”

According to Ivan Kapustyansky, the leading analyst at Forex Optimum, the decline in oil exports is caused by many factors. For example, in December 2019, Russia pledged to further reduce the output of crude in 2020 by agreement of OPEC+ countries. The reduction should stand at 70,000 barrels per day. This will inevitably affect exports. As a matter of fact, reducing the supply of oil by exporters in order to raise prices is the main idea of the agreement.

Artem Deyev, the head of AMarkets analytical department, said that oil exports from Russia to neighboring countries have also decreased due to lower supplies of raw materials to Belarus. In January 2020, with the planned volume of 1.99 million tonnes, 407,200 tonnes were supplied to the republic.

In the future, if a compromise is reached, these supplies may be recommenced to the full extent. However, in Kapustyansky’s opinion, it should be taken into account that Belarus is also negotiating with other suppliers. In particular, Kazakhstan and Azerbaijan. U.S. Secretary of State Mike Pompeo said on February 1, 2020 that Washington is ready to provide Minsk with energy resources. However, purchases in Russia may be more preferable in terms of prices and specifications.

Meanwhile, in Deyev’s view, in 2020, oil exports from Russia on the whole are expected to drop by 3.8% to 229.5 million tonnes in the wake of reduced consumer demand in Europe. At the background of overproduction of "black gold" in the global market, the situation in China will lead to an even greater reduction in demand, which will bear pressure upon market quotations. OPEC's decision to reduce production more may have a short-term positive effect, but for the year as a whole the quotations will not exceed $52-56 per barrel.

By the way, speaking about OPEC, not only market factors play an important role here but also fundamental factors which the cartel is trying to fight with, that is, the decline in demand for oil around the world. In 2019, traditional oil producers -- primarily OPEC countries – continued losing their share of the market. The organization is extremely interested in increasing the cost of raw materials by any means as, among other things, the member-states’ budgets depend on it. By the way, this fully applies to Russia as well.

Problems in the oil industry of Venezuela and Iran have negative impact on the market, too. In 2019, there was almost complete collapse of the industry in Venezuela: production fell to 0.7 million barrels per day (mbpd) in December. In Iran, oil exports actually fell by 50% in comparison with the last year (below 1 mbpd). Of course, shale oil from the US should not be ignored also. In 2019, the production of oil and gas condensate in the U.S. increased by almost 10%, and now it comes to 18.5 mbpd. President Donald Trump has repeatedly stated that he has no intention of allowing energy prices to hike, and offered to supply oil and gas from the U.S. to anyone who is interested in them, actively creating these new partners with the help of his policy.

So there is more than enough pressure on the commodity market now. In the short term, the trend of declining volumes has all chances to strengthen in 2020, said Alexey Kiriyenko. Agreed before the end of 2019, the steps limited the output of oil even stronger, and the slide in January and early February forced OPEC+ representatives to urgently gather in Vienna to discuss new production cuts. Deyev adds that the declining demand and falling oil prices will have a negative impact on Russian producers' profits. The biggest losses will be felt by Rosneft, 60% of which is exported to China.

And what about Russia and its budget, which is tightly tied to oil prices for now? At the end of 2019, thanks to a fairly stable cost of raw materials, the authorities managed to replenish the Russian National Wealth Fund substantially, so now they still have an "energy boost." However, during the coronavirus outbreak prices fell below $50 per barrel, which is already critical for budget revenues.

So, we will still feel the negative trends in the raw materials market which are only increasing in recent years. Although recently we have the efforts to develop the economy with less dependence on oil market fluctuations, the result is still a long way off, as is the abandoning of the so-called "oil needle," on which our country has long been trainspotting.