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There were 2 developments this week that could have huge consequences for Russia’s oil

  • Protests swept across Russia on Monday
  • The US Senate passed a bill that would tighten sanctions on Russia
  • These developments will have an impact on how Russia’s oil strategy plays out

Oil watchers have mostly focused on the Middle East and the United States in recent months, but this week saw two notable developments for the third major energy behemoth, Russia.

On Monday, protests against corruption swept across the country in over 100 cities. The protests were organized by the social media-savvy opposition leader Alexei Navalny. Over 1,000 protesters were reportedly detained.

Then, on Wednesday, the US Senate voted 97-2 to pass a measure that would tighten sanctions on Russia, and prevent the White House from unilaterally easing or removing the sanctions imposed earlier by the Obama administration. (The only two opposing votes were Republican Sens. Mike Lee and Rand Paul.)

These two events could have major consequences for oil. Russia is nearing presidential elections, and the government is likely keen to minimize social unrest leading up them. And so, as the hope for near-term sanctions relief deteriorates and new oil development becomes more difficult, Russia will likely remain one of the key drivers of the OPEC/non-OPEC production cuts, which aim to keep oil prices higher.

Protests and presidential elections

“It certainly was not the best week ever for Russian President Vladimir Putin with new public protests breaking out at home and the US Senate moving to entrench economic sanctions,” said Helima Croft, the head of commodity strategy at RBC Capital Markets, in a note.

Monday’s protests followed an earlier wave that took place in March 2017, which were some of the biggest demonstrations in years. Analysts said the geographic spread of the protests and the fact that many of the protestors were young were striking.

Meanwhile, the sanctions bill still needs to pass the House and be signed by US President Donald Trump to become law. Nevertheless, it could have implications for US-Russia relations and Russian energy.

And that, in turn, could have implications for the March 2018 Russian presidential election. Putin has not officially announced whether he is running, although virtually everyone expects he will.

“The oil price imperative seems especially strong now that sanctions relief looks ever more elusive,” Croft said. “We continue to see the need to ensure a successful electoral outcome with minimal social strife as a key driver of Russian energy policy and their willingness to co-pilot the OPEC/non-OPEC production cuts.”

The OPEC deal

OPEC and non-OPEC producers recently agreed to extend production cuts through March 2018. Notably, Saudi Arabia and Russia together said they favored the extension before the official OPEC meeting.

OPEC and several other major producers (but not the US) agreed to cut production back in November 2016. The cut reflected producers’ desires to end the global supply glut, which has kept oil prices depressed for over two years and increased financial stresses for producers at home.

Saudi Arabia's Energy Minister Khalid al-Falih (L) and Russia's Energy Minister Alexander Novak attend a joint briefing in Beijing, China May 15, 2017. REUTERS/Aly Song Saudi Arabia’s Energy Minister Khalid al-Falih and Russia’s Energy Minister Alexander Novak attend a joint briefing in Beijing Thomson Reuters

Sanctions and the future of Russian oil

Meanwhile, the bipartisan sanctions measure would require the president to inform Congress before taking any action that could alter US foreign policy with regard to Russia, including changes to the sanctions imposed by former President Obama in response to Russia’s annexation of Crimea in 2014 and meddling in the 2016 presidential election.

“If the legislation passes the House, Russian sanctions will more closely resemble Iranian ones and the President’s room to maneuver in this sphere will be circumscribed,” Croft explained.

Throughout the campaign, Trump advocated improving relations with Russia.Immediately after his election, analysts believed that there was a possibility that the sanctions imposed on Russia over Ukraine could be lifted. Russian equities climbed and the ruble was among the best-performing currencies at the time.

The new bill also expands sanctions in two ways, which will hamper Russia’s ability to develop “next-generation” oil resources, Edward Fishman, a fellow at the Atlantic Council, explained in a post.

The current sanctions leveled on Russia by the Obama administration include the prohibition of technology transfers for Russian energy projects in the Arctic, Siberia, and the Black Sea. They also prohibit dealings with state oil company PAO Rosneft CEO Igor Sechin.

However, the new bill would extend sanctions to Russian companies more broadly, and to foreign companies doing business in Russia.

The measure “brings projects in which Russian companies are involved — regardless of where they are located — under the purview of sanctions. That means Russian companies will be denied the opportunity to amass expertise in advanced drilling techniques by learning from Western partners,” he explained.

FILE PHOTO:  A worker checks a pressure gauge at an oil pumping station owned by Rosneft in the Suzunskoye oil field, near Krasnoyarsk, Russia, March 26, 2015.   REUTERS/Sergei Karpukhin/File Photo A worker checks a pressure gauge at an oil pumping station owned by Rosneft in the Suzunskoye oil field, near Krasnoyarsk Thomson Reuters

Additionally, the bill “requires the executive branch to impose sanctions on foreign firms that make significant investments in next-generation Russian oil projects,” Fishman added. “This provision — a classic case of secondary sanctions — will discourage companies around the world from investing in Arctic offshore, deepwater, and shale oil projects in Russia, diminishing the risk that lost US business will be backfilled by foreign competitors.”

“Taken together, the energy sanctions in the bill will likely block Russia’s development of next-generation oil resources, which can take many years to develop, for as long as the sanctions are in place,” he explained. “For Russia’s oil-dependent economy, this is a big deal.”

The Russian ruble was down by 0.7% at 57.8543 per dollar, while Brent crude oil, the international benchmark, was down by 0.2% at $46.91 per barrel Thursday afternoon ET.

Business Insider

6 Comments on "There were 2 developments this week that could have huge consequences for Russia’s oil"

  1. bobinget on Fri, 16th Jun 2017 9:07 am 

    Checking a gauge for pressure when he knows there is none.

    Saudi and Russian propaganda machines are working 24/7 in a heroic effort to boost oil prices.

    As oil companies, nations fail, markets will respond.

    Any farmer, even Russian farmers, will tell you, single cropping year after year becoming dependent on that income, not reinvesting in alternatives, disaster’s recipe.

    One gallon of organic vanilla two years ago sold for
    $60. today, because of a hurricane that wiped out
    one third of Madagascar’s Vanilla crop, one gallon
    of vanilla now sells for $220.
    In three of four years vanilla will be back to inflation adjusted $60.

  2. joe on Fri, 16th Jun 2017 9:23 am 

    The U.S. does realise that these bills are passed in congress and they exist only in the minds of the U.S. and some EU states and somtimes the UK, they are unenforced and unenforceable without risking War with
    Russia. All they really do is limit POTUS scope for making deals and show Russia exactly the kind of deal making hand the U.S. has. When in history has Saudi made common cause with Russia? Qatar an enemy is sold jets by the U.S. Iran won the Iraq war by proxy and Syria will not be the Saudi transit for EU gas they intend to steal from Qatar. My guess is the Qatar is stupid enough to accept the jets and then Saudi-Trump will say they were forced to bomb Qatar due to an air threat. The world is changing

  3. Sissyfuss on Fri, 16th Jun 2017 9:36 am 

    WTI at $44.63. Short, you watching this?

  4. rockman on Fri, 16th Jun 2017 11:56 am 

    OK let’s see the potential collateral damage of US sanctions sanctions inhibiting Russian oil exports. Recipients of Russian oil:

    The Netherlands – 17% (Much reexported to other EU nations.

    China – 11%
    Italy – 8%
    Japan – 7%
    Germany – 6%
    S Korea – 6%
    Poland – 4.5%
    Belarus – 3.5%
    Latvia – 3.5%

    So 2 questions. First, how would US tech sanctions prevent China (which has ready access to all western tech) from sharing with the Russians? China which receives a significant amount of oil from Russia. Second, how much economic damage is the US willing to inflict on its allies in the effort to cause economic pain in Russia.

    BTW the US petroleum industry is all for inhibiting Russian oil production as much ASD possible. Anything to reduce global oil production that puts upward pressure on prices is okie dokie with us. LOL

  5. Anonymouse on Fri, 16th Jun 2017 12:25 pm 

    The protests were organized by the social media-savvy opposition leader Alexei Navalny.

    Alexi, it is worth noting, since BI wont, is on washingdums and Tel Aviv’s payroll. Put another way, Alexi, along with all these ‘protests’, are being financed and guided by uS backed NGOs that still operate inside Russia. President Putin is quite safe regardless how many ‘protests’ the jew-york based color-revolution complex manages to stage. If I were president Putin, I would less concerned about the protests themselves, and more about increasing restrictions on uS based color revolution ‘NGO’s and or cutting off their funding.

    Navalny, is to put in the the simplest terms, a traitor to his nation, a stalking horse for uS and zionist interests. The same interests that would like to see Russia’s energy totally privatized, that is to say, under globalist ownership and control. I suppose that explains the Navaly\Oil angle to a story that on the surface, has nothing to do with a 4th rate uS controlled ‘opposition leader’.

    The other thing worth noting, is the 100 cities, 1000 protester figure. Despite this ‘story’ being currently dated, the figures are the exact same as ones quoted in stories dated from MARCH.

    Perception management indeed.

  6. MASTERMIND on Fri, 16th Jun 2017 4:40 pm 

    Collapse of Global Civilization by 2020-Irrefutable Evidence

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