Oil glut and stronger rouble strengthen case for Russia to cut output

Internal factors driving Russian thinking; Russia faces oil glut at home amid dispute with Belarus; rouble likely to strengthen on Sberbank sale deal

Agrowing oil glut in Russia and the promise of a flood of dollars from the sale of a leading bank are strengthening the case for Russia to cut oil output in tandem with Opec, oil sources said.

The Organisation of the Petroleum Exporting Countries, Russia and other producers have for more than a year implemented a deal to cut oil output by 2.1mn barrels per day to support the market.

The agreement expires at the end of March. Opec has recommended extending the output curbs and deepening the combined cuts because of the impact of the new coronavirus in China, which the International Energy Agency said on Thursday would contribute to oil demand falling year on year in the first quarter.

The Kremlin has said no decision has been taken yet on whether Russia agrees to extend or deepen the output curbs — the final decision lies with President Vladimir Putin.

But a $38bn deal under which the finance ministry will buy state lender Sberbank is due to start in April and promises to swell state coffers, with Russia using a big chunk of its dollar national wealth fund to the central bank’s stake.

This is expected to lead to a stronger rouble, which is a factor that is generally disliked by oil exporters as it hits their profits. At a meeting on Wednesday, oil companies asked energy minister Alexander Novak to tell central bank governor Elvira Nabiullina that they do not favour a strong rouble, two sources familiar with the outcome of the meeting said.

“A lot of dollars will come to the market, boosting the rouble, so ‘a rouble barrel’ will become cheaper,” one of the two sources familiar with the outcome said.

The source said a stronger rouble was an “important factor” in the decision on whether to deepen cuts in what is known as the Opec+ deal following a proposal by its partners in the agreement to add another 600,000 bpd to the combined cuts.

Both sources said that two Russian oil companies, Surgutneftegaz and Zarubezhneft, in particular had raised the exchange rate issue.

The companies, the energy ministry and the central bank did not reply to Reuters’ requests for comments.

A number of oil executives, after leaving the energy ministry on Wednesday, told reporters that no final decision had been taken but the basic scenario was to extend the existing Opec+ deal to endJune.

Nabiullina said on Thursday she did not expect a “significant” impact on the money market from Sberbank’s sale although the economy ministry has raised its rouble rate forecast by nearly 2 roubles to 63.9 per US dollar for this year.

Another factor in Russia’s decision is a disagreement with Belarus under which Moscow has halted its 240,000 bpd supply of oil to its neighbour. In addition to this, the number of Russian oil refineries undergoing maintenance will peak in April-May, according to energy ministry data and Reuters calculations, freeing up another up to 580,000 bpd of oil.

Russia is reallocating oil flows meant for Belarus to other destinations but the upcoming peak in maintenance means it will be flooded with crude, an oil trader told Reuters.

“A decision on (resumption of supplies to Belarus) should be taken in early March,” the oil trader said. “We can add a couple more cargoes on the Baltic (ports) but it is not possible to add more.”

A worker inspects a pumping jack during oil drilling operations in an oilfield operated by Bashneft in Russia (file). A growing oil glut in Russia and the promise of a flood of dollars from the sale of a leading bank are strengthening the case for Russia to cut oil output in tandem with Opec, according to sources.