Non-OPEC Cutback Participant Russia Sees Oil at $40/bbl Heading into 2018

Russia, the key non-member participant in the Organization of the Petroleum Exporting Countries (OPEC) cutback initiative now ending its second month and intended to bolster prices via a market rebalance, said Friday that it sees Urals at an average of $50 per barrel this year, but falling to $40 at the end of 2017 and staying near that level until 2019.

The $40 price level is also being used by Russia's central bank to calculate the country's budget in 2017-2019.

While the announcement is viewed in some quarters as having the potential to cause further market jitters in advance of the OPEC meeting this weekend to discuss compliance and a possible extension of the cutbacks, Piotr Matys, an emerging market currency strategist at Rabobank, said, "The finance ministry, the cabinet, and the central bank are leaning on the cautious side in terms of their expectations regarding growth, driven still to a large degree by oil.

"It's better to be conservative and to be surprised on the upside than too optimistic and end up disappointed."

Viktor Szabo, bond fund manager at Aberdeen Asset Management Plc., agreed that taking the conservative approach "leaves room for upside surprises."

But Russia sticking to $40 can also be viewed as a clear sign it does not fully buy into the efficacy of the OPEC cutbacks, at a time when an extension of the cutbacks are increasingly being viewed as the last remaining hope for triggering some degree of market rebalance.

However, this doesn't necessarily mean the country won't go along with further cuts for the remainder of 2017; in fact, Reuters reports that Russia's private oil producers "are ditching their skepticism and lining up" behind the extension proposal.

Vagit Alekperov, chief executive of Lukoil, said last week it was "expedient" to continue cuts - an about face from last year when he declared there was no point in Russia doing any deal with OPEC.

Additionally, Tatneft stated to Reuters in an email, "We are ready to cut production at the levels, which lead to a financial result... but without harm to future output"; and Russneft claims it is ready to extend production cuts if it "serves Russian interests....we hope the oil prices rise will offset out losses from the production cuts."

As far as Saudi Arabia, the de facto leader of the OPEC cutbacks, is  concerned, it will apparently do anything to keep the Russians happy and the reduction agreement afloat: in anticipating May as the month when the cartel will decide to extend the cuts or not, Khalid Al-Falih, energy minister for the Saudis, earlier this week complained that Russian compliance is "slower than what I'd like, but I think we are patient and we will see where we are in May and take it from there."