Russia’s budget bets on $40 oil, ignores OPEC deal

Russia is sticking with an assumption that oil will average US$40 a barrel in the next three years and won’t revise its budget outlook after a preliminary agreement by OPEC on its first production cut in eight years, says Finance Minister Anton Siluanov.

Although crude is trading near US$50 after Wednesday’s announcement, heading for the first September increase since 2010, “we know prices are adjusted after such statements,” Siluanov told reporters in Russia’s Black Sea resort of Sochi. The price of Russia’s main export blend ,Urals, used to calculate the country’s budget “was and remains” at US$40 a barrel, he said.

“You think it’s stabilized?” Siluanov said. “We need to see how realistically the decisions will be implemented.”

Although the world’s biggest energy exporter has signalled it’s willing to join efforts with OPEC to control global supply, it’s on course to pump oil at a post- Soviet record in September, adding as much as 400,000 barrels a day to the country’s output.

The surprise deal, which will see the Organization of Petroleum Exporting Countries reduce production to a range of 32.5 million to 33 million barrels a day, sent oil surging more than five per cent.

The market was caught by surprise after Saudi Arabia and Iran had signalled before the meeting that an accord was unlikely.

OPEC now faces the challenge of implementing the cuts, with Goldman Sachs Group Inc. and Morgan Stanley expressing skepticism that it can be completed. Prices may struggle to hold above US$40 a barrel unless OPEC acts, Citigroup Inc. predicts.

Already running its widest deficit since 2010 this year after oil’s collapse, Russia is preparing its budget for the next three years. The Finance Ministry has proposed a fiscal gap of 3.2 per cent of gross domestic product in 2017. It then plans to reduce the shortfall by one percentage point each year, to balance the budget by 2020.

The deficit will be wider this year than earlier forecast and may increase to as much as 3.7 per cent of GDP, beyond the earlier estimate of 3.2 per cent, according to Siluanov.

Should oil trade above US$40, “we’ll spend less from reserves — that’s our approach,” Siluanov said. “On the other hand, output limits aren’t the only factor that affects the price of oil. There’s also the issue of global demand, how the world economy will develop — that will also affect pricing.”

Another question is how the U.S. shale industry will react, Siluanov said.

“That’s also a large supply volume, because shale projects very quickly get turned around,” he said. “Which is why we can see additional supply on the oil market.”

Brent crude, which is used to price Urals, dropped as much as 90 cents, to US$48.34 a barrel, on the London-based ICE Futures Europe exchange. Prices are up 2.9 per cent this month and down 2.6 per cent for the quarter. The price of oil in rubles is at 3,077, compared with the level of 3,165 which Russia used as a basis for this year’s budget.

Oil will need to hold above US$50 a barrel for months before U.S. companies commit to more spending, according to analysts at firms including S&P Global Platts and Oppenheimer & Co.

The number of rigs targeting oil in the U.S. climbed to 418 in the week ended Sept. 23, the highest level since February, according to data from Baker Hughes Inc.

Output limits aren’t the only factor that affects the price of oil. There’s also the issue of global demand.