Russian oil may gain a lot by giving a little on OPEC U-turn

MOSCOW (Bloomberg) -- Russia’s oil industry is feeling the pressure of a possible return of production caps. In fact, by sacrificing a fraction of output, the companies could see their stocks rise.

Fresh output curbs may push crude prices up, benefiting Russian producers just as they did during the cuts that began last year. The Moscow Oil & Gas Index has gained about 40% since the initial output pact between OPEC and Russia was reached almost two years ago.

The Organization of Petroleum Exporting Countries has signaled it will consider a return to cutting supply next year as oil prices wilt in the face of another surge in U.S. shale production. A new deal would come just as Russia’s production climbs to a post-Soviet high -- following its June agreement with OPEC to ease supply caps -- and its oil companies generate record cash.

“History shows that we are able to turn production cuts to our advantage,” said Alexander Kornilov, an Aton LLC analyst in Moscow. “If we look at how the Russian oil and gas index has moved since 2016 -- when the country first agreed on production cuts with OPEC -- everything becomes clear.”

Russian oil executives met with Energy Minister Alexander Novak Thursday to share their views as they put together investment plans for next year. It was a surprisingly low-level meeting, with only one chief executive in attendance, and addressed general cooperation with OPEC rather than specific output figures, according to Lukoil PJSC.

“We haven’t discussed yet” whether further cooperation means output cuts in 2019, Lukoil First V.P. Ravil Maganov said after the meeting in Moscow, adding “I can’t rule out” production curbs.

OPEC and its allies, including Russia, are scheduled to meet for talks this weekend in Abu Dhabi. While Novak and Saudi Energy Minister Khalid Al-Falih have discussed the agenda, Russia isn’t yet ready to take any decision on renewed supply curbs, an official familiar with the matter said.

Any OPEC+ agreement that can stabilize crude prices above current levels will benefit Russian oil companies, according to Alexander Losev, chief executive officer of Sputnik Asset Management.

“Producing less at $80/bbl is better than producing at current levels and at $70/bbl,” he said. “A certain output decline will also help the companies to reduce operating costs and further improve their financials, including free cash flow.”

Russian crude production rose to a post-Soviet record of 11.4 MMbpd in October, driven mainly by state oil giant Rosneft PJSC, which this week said its output might increase by a further 4% in 2019.

With regard to the extent of any new output caps, “I believe they wouldn’t be that significant,” Raiffeisen Centrobank analyst Andrey Polischuk said, adding that next year would be no worse than 2018. “The reality may turn out not so grim for Russian big oil.”