Russia-China oil friendship blossoms, Saudi Arabia left behind

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As of April, Russian oil shipments to China hit a record high, again beating out Saudi Arabia as the largest exporter to China.

Beijing bought 1.17 million barrels oil per day (bpd) from Russia in April, surpassing the previous record of 1.13 bpd set in December of this year, Reuters reported citing customs data released Monday.

This is the second time this year that Russia has topped Saudi Arabia in oil exports to China.

Saudi Arabia’s April imports dropped to 1 bpd, a 21.8 percent drop year on year. Russia’s oil shipments to China increased 52.4 percent in April, compared to last year.

The result of the surge in Russian exports likely involves a middleman trader who bought the product when oil prices were lower and is now up selling it.

“The record high import volumes from Russia were likely fueled by independent refiners, who are storing oil that they had earlier purchased at lower flat prices,” a trader with a Chinese company told Reuters.

Now that oil prices have recovered to over $50 per barrel (the first time in 6 months) China may not be as keen to buy as much from its resource-rich neighbor.

Russia is counting on China to become its biggest energy customer as demand from Europe weakens along with diplomatic relations.

The trend plays well into Russia’s narrative of ‘pivoting’ towards China after being shut out of Western markets due to sanctions.

Russia is happy to play second fiddle to China in challenging the economic and political hegemony of the West. Beijing is now the go-to source for major financing projects, such as the Yamal LNG project, or the pending energy partnerships with Gazprom and Rosneft.

In exchange, Russia is giving China what it wants – assets in Russian oil fields and projects. Most recently, Rosneft, Russia’s top crude producer, has been in talks to sell nearly 50 percent stake in the company’s second-largest oil field, located in eastern Siberia, to China.

Russia to (re)privatize state-oil company Bashneft by June

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Russian President Vladimir Putin has approved the privatization of state oil company Bashneft, RIA Novosti reported on Tuesday.

“There is such a possibility. I believe that this is one of the three assets which is most prepared (for privatization),” TASS quoted Russia’s Finance Minister Alexey Ulyukaev as saying.

The government currently owns a majority (50% + 1 share) in Bashneft, one of Russia’s more efficiently run oil companies. The regional government in the Russian republic of Bashkortostan holds a 25% stake.

In 2014, the Russian government re-nationalized Bashneft, then the country’s fifth largest oil company, after accusing the CEO of illegally privatizing the company’s assets back in 2009.

The privatization of Bashneft would help the Kremlin raise cash to fill the gap in budget revenues, which have been hit hard by low oil prices. The Russian government has been vocal about the privatization of state companies since Medvedev’s presidency from 2008-2012, but the ideas haven’t been put into practice.

Other oil companies on the privatization State-owned oil transportation monopoly
shortlist are Rosneft, Russia’s largest oil producer, and Transneft, the state-owned oil transport company. The Kremlin owns 69.5% of Rosneft and 100% of Transneft, so there is an option to simply lower the government’s stake in these companies, and still retain a controlling stake.

Bashneft produces, refines, and distributes oil and petroleum products both in Russia and abroad. A majority of output is sourced from Russia’s Ural and Volga regions, as well as Western Siberia.

Where is Oil Going? Keep an eye on Kuwait, Libya, and Saudi Arabia: Interview with Saxo Bank’s Ole Hansen and John J. Hardy

Ole S Hansen2
Ole Hansen, Head of Commodity Strategy at Saxo Bank

It’s the question on everyone’s mind: is oil going to recover, and if so, when? Doha disappointed bullish commodity investors after the OPEC alliance failed to agree on an output freeze to tighten the oversupply of crude oil, and the price dropped below $40 per barrel.

To get to the bottom of this question, Netianka interviewed Ole Hansen, Head of Commodity Strategy at Saxo Bank, as well as his colleague John J. Hardy, who is the Head of FX Strategy, to gain some insight on how the currency market is affected by crude prices.

Neftianka: What factors influence the situation on the oil market today? Please, share your vision for the commodities market trends in Q2.

Ole Hansen: The main factors impacting oil markets at the moment are higher prices. The rebalancing process is well underway, especially in North America where the high-cost US and Canadian producers are forced to cut production. Global demand continues to rise and together with the slowdown in non-OPEC production this will help support the price over the coming months. Capex cuts worth billions of dollars has created a situation where the market focus eventually will shift from oversupply to lack of supply. In the very short term, the oil worker strike in Kuwait has been a major supporting factor as it has removed more than 1.5 million barrels of daily production. A faster than expected increase in production from Iran, and a stabilizing Libya raises the prospects of barrels returning from Libya which used to produce 1.6 million b/d and now only adds around 300,000 barrels to the market.

Following the failed Doha meeting, there is a risk that the power structure in Saudi Arabia has changed, thereby increasing the political impact on oil prices. If Saudi Arabia turns its oil weapon on Iran and begins increasing production, as threatened, a revisit to the low $30s cannot be ruled out. In the very short term, a record long speculative position in Brent crude could have a significant negative impact on the price if events trigger a need to reduce exposure.

We expect crude oil to be range bound between 35 and 45 this current quarter, before moving higher in the second half towards $50 by year-end. Even if we see the market start to rebalance we still have an overhang of 100s of millions of barrels of oil in storage, which needs to be reduced. This will add supply over the coming months, especially as the contango begins to contract. A smaller contango reduces the profit oil companies will make, and from putting cheap spot crude in storage and selling it at a higher future price.

What will be the dynamics of oil and energy companies’ shares in these conditions? Which of them is worth investing in today?

Ole Hansen: Energy companies are starting to breathe again after having been under severe pressure during the sell-off. Renewed investments, however, will require higher prices than what we currently have. On that basis, further cost reductions will be seen over the coming months, unless we have an unexpected sharp recovery.

There will be some great investment opportunities among US shale oil producers, once the price rallies. Oil from these will be needed in a few years’ time as many other countries, including Russia, are getting close to being maxed out in terms of production capacity.

John Hardy
John Hardy, FX Strategy at Saxo Bank

What will be the dynamics of the ruble and dollar in the short term?

John J.Hardy: An ugly slowdown in global trade and higher rates from the Fed to tamp down inflation from tariffs could actually (and somewhat ironically) lead to a stronger US dollar, particularly if US consumption is pinched off and the US current account deficit goes into a large surplus.

The very dovish March FOMC meeting had everyone calling the end of the USD bull market. It may not be over yet, however –merely delayed. The US is the major economy best positioned in case of a crisis as its banking system is least vulnerable and it is well-positioned if the recovery picks up again as well on the prospects for policy divergence.The market has seen an absolutely head-spinning Q1 with first a massive drop in global risk appetite on concerns over a Chinese devaluation, fears of Fed tightening and financial conditions in Europe. This then suddenly yielded to an even larger rally in sentiment as China declared its intent not to do a large devaluation, the Fed turned dramatically dovish (clearly more to shore up confidence and global liquidity as US economic conditions were not sufficiently weak to warrant the Fed’s change of tune) and the ECB’s new measures calmed financial conditions in Europe. So the strength in the ruble this quarter has mainly been a function of the above, and added to that that relative stability and even strength in oil prices, which have removed the fear for now, at least, that they will continue to spike lower.

The very dovish March FOMC meeting had everyone calling the end of the USD bull market. It may not be over yet, however –merely delayed. The US is the major economy best positioned in case of a crisis as its banking system is least vulnerable and it is well-positioned if the recovery picks up again as well on the prospects for policy divergence.The market has seen an absolutely head-spinning Q1 with first a massive drop in global risk appetite on concerns over a Chinese devaluation, fears of Fed tightening and financial conditions in Europe. This then suddenly yielded to an even larger rally in sentiment as China declared its intent not to do a large devaluation, the Fed turned dramatically dovish (clearly more to shore up confidence and global liquidity as US economic conditions were not sufficiently weak to warrant the Fed’s change of tune) and the ECB’s new measures calmed financial conditions in Europe. So the strength in the ruble this quarter has mainly been a function of the above, and added to that that relative stability and even strength in oil prices, which have removed the fear for now, at least, that they will continue to spike lower.

The market has seen an absolutely head-spinning Q1 with first a massive drop in global risk appetite on concerns over a Chinese devaluation, fears of Fed tightening and financial conditions in Europe. This then suddenly yielded to an even larger rally in sentiment as China declared its intent not to do a large devaluation, the Fed turned dramatically dovish (clearly more to shore up confidence and global liquidity as US economic conditions were not sufficiently weak to warrant the Fed’s change of tune) and the ECB’s new measures calmed financial conditions in Europe. So the strength in the ruble this quarter has mainly been a function of the above, and added to that that relative stability and even strength in oil prices, which have removed the fear for now, at least, that they will continue to spike lower.

Which factors determine the dynamics of EUR today?

John J.Hardy: The market suspects that the ECB has given up on proving its “currency warrior”chops on the limitations of pursuing ever more negative rates. At the same time, fresh QE measures are met with a shoulder shrug, as easy credit does not stimulate demand.

Meanwhile, the political will to act on the fiscal side remains nonexistent. Not sure where this leaves the euro except a bit sideways for Q2 with downside risks further out from the wake of a Brexit and our theme of the breaking of the social contract and EU political challenges dead.