Russian factory activity shrinks to its slowest pace in 13 months
Many factories reopened and firms showed signs of bouncing back in June from the havoc wrought by the coronavirus pandemic
Russian manufacturing activity shrank in June but at its slowest rate for 13 months, as many factories reopened and firms showed signs of bouncing back from the havoc wrought by the coronavirus pandemic, a survey showed on Wednesday.
The Markit Purchasing Managers’ Index (PMI) for factory activity rose to 49.4 in June from 36.2 in May, remaining below the 50.0 mark dividing expansion from contraction but well above April’s record low of 31.3.
Output increased for the first time since May 2019, with some firms citing the return of factories and consumers after the easing of coronavirus lockdown measures, and others attributing the growth to the fulfilment of orders made before the pandemic hit.
Business confidence turned positive, reaching a five-month high of 64.5 as it rebounded from falling into contraction for the first time last month, with firms linking that optimism to the resumption of production and interest from clients.
“Manufacturers showed renewed optimism towards the outlook for output over the coming year amid hopes that the worst is now behind them,” said Sian Jones, an economist at IHS Markit, which compiles the survey.
“Nonetheless, our current forecast signals a 7% decline in Russian industrial production on the year is expected in 2020 as challenging external demand conditions are set to weigh further on new orders.”
Meanwhile, Russia is taking a leaf out of the US shale playbook so it can ramp up oil production quickly and hang on to its share of the global market when demand finally recovers after the coronavirus pandemic.
At least two state-owned banks, Sberbank and VEB, plan to lend oil firms some 400 billion roubles ($6 billion) at effectively almost zero interest rates to drill about 3,000 unfinished wells, officials involved in the scheme told Reuters.
Once oil prices recover, the wells can be finished off faster than starting from scratch so Russia can get its output back to levels reached before it agreed along with other leading producers to cut supply because of the fallout from COVID-19.
US shale producers tend to drill but not complete wells when oil prices are low, rather than freezing all activity, so they can finish off the wells and quickly boost production when demand picks up.
A geologist advising Russian oil firms said the new wells would add at least 200,000 barrels per day to output based on average flow rates but if their assumptions about large reserves pan out the wells could boost output by 2 million barrels.
The geologist declined to be named because he is not authorised to talk to the media.
While Energy Minister Alexander Novak said last week how much would be invested in the drilling programme, details of how the scheme will work, the number of wells and by how much oil output could increase have not been disclosed.
Novak’s deputy Pavel Sorokin, a former oil and gas analyst at U.S. bank Morgan Stanley and one of the architects of the plan, declined to comment on the number of wells or their expected output.
Russia pumped an average of 11.3 million (bpd) from 180,000 wells last year, according to the energy ministry. Since the OPEC+ deal to curb global crude supplies, its output has fallen by 2 million bpd, Novak said last week.
Russia has mainly shut down old or lessproductive wells that won’t necessarily be revived when the supply deal expires in April 2022, so the government is helping oil companies to ensure lost output can be replaced quickly.
“Such support would allow us to create an essential number of unfinished wells, ready to be launched when we will need to increase production,” Sorokin told Reuters.
Russia has outlined various stimulus measures to cope with the fallout from COVID-19 and spending over the next two years is expected to reach 5 trillion roubles. It was not clear if the planned support for oil companies would come from these funds.
Saudi Arabia and the United States are able to resume halted oil production faster than Russia, analysts say, and Moscow is wary about losing out as and when the market returns to normal.
Cold weather is the main reason it is more expensive and takes longer to restart wells in Russia than in Saudi Arabia, said Daria Surova, an analyst at consultancy Rystad Energy.
Russian oil tends to be deeper in the ground and in thicker layers, while heavy drilling equipment needs to be moved to Siberian fields during winter when swamps and rivers are frozen, said Sergei Klubkov, a research director at Vygon Consulting.