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Weak Ruble Insulating Russia From Low Oil Prices

If oil can maintain a fairly low price of $60 per barrel, Russian energy companies can survive a drawn-out depression in the global industry, according to Wood Mackenzie, the energy and mining consultancy based in Edinburgh.

The reason is that the costs of extracting oil and gas are based on a devalued ruble, which makes them low for producers such as the state-run Rosneft and Gazprom, respectively. But the two companies products are sold on the world market for dollars, not rubles, making their profit margins higher, according to a Wood Mackenzie analysis published July 17.

The average global price of oil began dropping in the early summer of 2014, plunging from more than $100 per barrel in June to below $50 early this year. At that time, the value of the ruble plunged 41 percent against the dollar as a result of the drop in oil prices and the sanctions imposed by Western countries on Russia because of its role in the Ukraine unrest.

Related: What The Iran Deal Could Mean For Natural Gas Markets

The price of oil has since recovered somewhat, now nearing $60 per barrel. And a month ago, Russia’s economic development minister, Alexei Ulyukayev, said he believed that “the oil market has attained certain stability.” Meanwhile, the ruble also began recovering and is valued at about 56 per dollar.

As a result, oil and gas production in Russia are very inexpensive from a global perspective, not only because of the ruble’s low value but also because the country already has in place a longstanding energy culture and infrastructure, Wood Mackenzie Research Director Valentina Kretzschmar said in a statement that coincided with the release of the firm’s analysis.

“This combination will help Russian producers stay competitive even if oil prices remain low,” she wrote.

Related: The Battle For China’s Oil Market

That doesn’t mean the news for Russia’s economy is altogether rosy. In December, the World Bank forecast a recession in the country in 2016, saying its gross domestic product was likely to contract by 0.7 percent. And that was predicated on oil priced at $78 per barrel.

Yet if Wood Mackenzie’s analysis is on track, then the World Bank may have to revise its view of the direction the Russian economy is taking. In her statement, Kretzschmar acknowledged that Russian energy companies at first were hit especially hard because low oil prices were followed by the sanctions, which kept some companies from doing business in Western markets.

But she added that “the slight rebound in oil prices this year, [a] stronger Russian ruble and higher dividend yields have led to stronger performance within the industry peer group in the recent months.”

Related: OPEC, Get Ready For The Second U.S. Oil Boom

Besides, despite their bite, the sanctions appear to have inspired Moscow to look beyond its traditional Western customers to sell its energy. Russian oil and gas producers have begun to increase their sales in the world’s developing countries with their growing economies, and Kretzschmar said she expects that effort to intensify.

“The sanctions imposed on Russia are pushing its majors abroad to new resource bases in Latin America, Africa and Asia – with most of the global hot spots still open for business with Russia,” she said.

By Andy Tully Of Oilprice.com

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  • smukster on July 20 2015 said:
    Wait a second...so it took you 10 months to figure this all-too-obvious fact out??

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