Expert Opinion

Russian oils: ban on using light oil products tanks postponed

Mon, 21 May 2012 00:00:00 +0400

According to Vedomosti, the Federal Transport Control agency has cancelled the ban on using tanks design for light oil products for transporting crude oil and dark oil products. The paper did not report the date when this regulation might be implemented again. Previously, oil companies had asked to postpone it until August 2012.

Russian oil companies: discounts on fuels and lubricants

Mon, 21 May 2012 00:00:00 +0400

According to Vedomosti, the Russian government is considering the possibility of eliminating the discounts on fuels and lubricants for agriculture producers. The discounts might be replaced by direct government subsidies. If the reform goes ahead, the cost of supporting agricultural producers would be borne by the government, rather than by oil companies. The total amount of subsidies is estimated at around RUB 16bn (USD 510mn).

CBR's reserves were down USD 4.1bn last week

Fri, 18 May 2012 00:00:00 +0400

In the week ending 11 May, the CBR’s gross international reserves decreased USD 4.1bn to USD 518.8bn. In separate news, Interfax has commented (according to the CBR’s 2011 annual report presented to Duma) that the currency breakdown of the CBR’s reserves was slightly reshaped in 2011 along with global dynamics: the share of USD was up 0.3pp to 45.5%, EUR was down 1pp to 42.1%. Interestingly, the share of CAD doubled to 1.6% (meanwhile, shares of JPY, GBP, and CHF were almost unchanged).

Industrial production growth dived to 30-month low of 1.3% YoY in April

Fri, 18 May 2012 00:00:00 +0400

According to Rosstat, industrial production growth kept slowing in April and reached 1.3% YoY, the lowest level since a decrease in October 2009, after the 4% YoY increase in 1Q12. This is significantly below the consensus forecasts of 3.2% (Bloomberg) and 2.5% YoY (Interfax), as well as our expectations of 2.8% YoY. Seasonally adjusted industrial production increased 0.1% MoM.

The detailed breakdown reveals that the growth in manufacturing increased to 3.6% YoY in April, from 2.4% YoY in March. Mining added 3.6% YoY, compared with the 2.4% YoY increase in March. However, the growth in utilities (electricity, water and gas distribution) was negative, recording a light drop of 0.6% YoY (vs. the 2.6% YoY increase in 1Q12).

EIA data – same again

Thu, 17 May 2012 00:00:00 +0400

Once again, US EIA data recorded a crude inventory build above expectations while product draws exceeded expectations and demand was a bit stronger YoY.

The 2.1mmbbl build in crude was significantly less than the 6.6mmbbl build reported by the API on Tuesday but still took crude inventory to 382mmbbl, the highest since 1990. Crude inventory at Cushing also increased to record levels (45.1mmbbl) which probably helps explain why WTI is again weakening against benchmark Brent despite the imminent start-up of the Seaway pipeline reversal.

Implied US all product demand rose 0.4mmb/d WoW (+2.2%) to 19.0mmb/d and, despite still being weak, has remained within the prior five-year range for six weeks now. Cumulative demand for the YTD is still down 3.9% YoY but the 52-week cumulative decline is easing. Falling on-road fuel prices might help the summer driving season which, by tradition, starts on Memorial Day, the last Monday in May. However, at USD 3.75/US gallon, gasoline remains expensive by US standards.

That US crude inventories are ample to excessive is not new news and while we are beginning to see a pick up from very low inventory levels everywhere else, that process might need to develop further if the pressure on oil prices is to be maintained; we believe that process is underway and will be sustained until Brent falls further toward the USD 100/bbl mark.

Federal budget was almost balanced in April

Wed, 16 May 2012 00:00:00 +0400

According to the Ministry of Finance, the federal budget recorded a deficit of RUB 60bn, or 0.3% of GDP, in 4mo12. The monthly budget was almost balanced, at 0.2% of GDP (RUB 10bn) in April, staying in positive territory for the second month in a row (March saw a budget surplus of 1.7% of GDP, or RUB 82bn). Monthly revenues increased 16.0% YoY (flat in MoM terms), with non-oil monthly revenues strongly up 26% YoY. Monthly expenditures were almost the same, at slightly above RUB 1tn during the first months of 2012. In April, budget outlays were up 13% YoY.

MinFin’s outstanding deposits in the banking system amounted to RUB 39.4bn at the end of April, down RUB 4.9bn from the end of March. The balance of MinFin’s accounts with the CBR increased RUB 259bn during the fourth month of this year.

CBR publishes preliminary April banking sector statistics

Tue, 15 May 2012 00:00:00 +0400

The CBR has published its preliminary Russian banking sector statistics for April. The key takeaways are as follows.

Loan growth accelerated, with the corporate loan book up 2.4% MoM and retail gaining 3.8% MoM vs. 1.9% MoM (28.2% YoY) and 3.5% MoM (42.0% YoY), respectively, in March.

Retail term deposits increased further, up 2.3% MoM (19.8% YoY).

Capital outflows moderated in April

Tue, 15 May 2012 00:00:00 +0400

The Ministry for the Economy estimates capital outflows at USD 8bn in April (which is lower than the USD 13.5bn in January, USD 9bn in February and USD 12.6bn in March, as calculated from the 1Q12 BoP data) and expects that this will continue in May. However, for the whole year the Ministry sees net private capital outflows slowing to USD 15-25bn in 2012, from USD 80.5bn in the previous year.

In addition, MinEconomy thinks that RUB is much weaker than it could be assuming such high oil prices: USD/RUB would be at 27-28 had capital outflows been more moderate in the first months of 2012.

Russian car and LCV sales remain robust in April

Mon, 14 May 2012 00:00:00 +0400

Car and LCV sales in Russia increased 14% YoY in April (to 266,267 units) and 18% YoY in January-April (to 880,540 units), according to the latest data from the Association of European Businesses.

Russia: Trade surplus in March still at a strong USD 19.4bn

Mon, 14 May 2012 00:00:00 +0400

According to the CBR, the trade surplus in March continued edging down slightly from the record high in 2mo12 (USD 20.7bn in January and USD 20.3bn in February), to USD 19.4bn. Exports were up only 5.4% MoM and 9.9% YoY to USD 48bn. Merchandise imports increased 13.1% MoM, and 5.9% YoY, to USD 28.5bn.

The trade balance increased to USD 60.5bn in 1Q12, from USD 54.2bn in 4Q11. Meanwhile, last quarter’s growth in exports of goods decelerated to 18.2% YoY, from 27.4% YoY in 4Q11, and imports growth slowed down to 12.7% YoY in 1Q12, compared with 18.3% YoY in the previous quarter.

IEA May OMR

Mon, 14 May 2012 00:00:00 +0400

In its latest Oil Market Report, the IEA has increased its 2012 global growth forecast 0.1mmb/d to 90.0mmb/d; YoY demand growth is unchanged at 0.8mmb/d. The non-OPEC supply growth forecast has been reduced 0.1mmb/d, but non-OPEC supply is still expected to grow 0.6mmb/d to 53.3mmb/d. The amendments to demand and non-OPEC supply forecasts feed directly through to a 0.2mmb/d increase in the call on OPEC crude to 30.3mmb/d.

In line with other secondary sources, the IEA estimates that OPEC crude production increased 0.4mmb/d MoM. That was the fourth MoM increase in a row and took production to 31.9mmb/d, outpacing the growth in the call on OPEC crude. Current production stands 1.6mmb/d above the call on OPEC crude for 2012.

OECD oil inventory rose 13.5mmbbl in March, in contrast to the typical 10.2mmbl draw. That took inventory to 2,649mmbbl, above the five-year average for the first time since May 2011. Days forward cover (DFC) increased to 60.3 days, 3.0 days above the five-year average.

In our view, this data set confirms our expectations that global oil markets were transitioning from an under to an over-supplied position that would drive up inventory and in turn pressure oil prices. If current OPEC production levels are maintained, we calculate that OECD DFC will exceed 62 days by YE, the highest since 1995. We continue to believe that market concerns around Iran will prove exaggerated, but that obviously remains a moot point. However, we expect that near term OPEC production is likely to increase further and, if maintained around current levels, we expect the Brent price to fall further than the 10% decline experienced since the beginning of April.

EIA data – Crude inventory highest since 1990

Thu, 10 May 2012 00:00:00 +0400

This week’s EIA data recorded another larger than expected crude inventory build, despite already high levels of inventory which have now reached 379.5mmboe, the highest since 1990. Product inventory fell more than expected but gasoline inventory remains ample, and tightening distillate is not a concern at this time of the year.

Product demand remains weak, despite WoW gains in implied demand for gasoline and distillate of 0.2mmb/d and 0.4mmb/d respectively, resulting in a small 0.1mmb/d rise in all product demand. All product demand remains negative on a YoY basis, though is showing signs of stabilising around the -3% mark on a 52-week average YoY basis. For gasoline, demand remained at -3.6% on a 52-week average YoY basis, and for distillate, this measure held at -0.6% YoY, in line with recent weeks.

Product imports declined sharply WoW to 1.6mmb/d, in stark contrast to the five-year average of 3.0mmb/d; distillate imports were virtually non-existent. Crude imports rose, despite swollen inventory levels, which we regard as negative for oil prices.

The IEA is due to release its monthly Oil Market Report on Friday and we expect it to show that crude inventory levels are rising outside the US, confirming that markets are now oversupplied.

Government approves increase in property tax for infrastructure companies

Thu, 03 May 2012 00:00:00 +0400

The Russian government yesterday approved the tax concept for 2013- 15, which among others envisages cancellation of the tax break on the property tax for infrastructure companies. The tax rate would be gradually raised from 0% to 2.2% of the asset base by 2019. Importantly, the government approved the compensation mechanism for all the companies involved via the indexation of tariffs, Vedomosti writes.

Factoring in the incremental tax would not have any effect on either EBITDA or net income, equally inflating revenues and costs.

EIA data: crude inventory build

Thu, 03 May 2012 00:00:00 +0400

For the sixth week running, the EIA data recorded a larger than expected build in crude inventory, together with a larger than expected products draw. Crude inventory builds are typical in the run-up to the summer driving season, though this year’s build has been steeper than normal, taking crude inventory levels above the prior five-year range. Days forward cover remain average to ample for crude and gasoline, albeit a bit tighter for distillate.

Implied all product demand remains weak, with a 0.2mmb/d WoW fall taking it to 18.5mmb/d. All product demand is down 4.7% for the YTD YoY and -3.2% on a 52-week average YoY basis (though this was a marginal improvement on last week’s 52-week average). Gasoline demand showed a marginal improvement on a WoW basis, gaining 0.2mmb/d to 8.7mmb/d, and also on a 52-week average basis, now at -3.6% YoY. Distillate demand, however, continues to drop and was down 8.8% YoY, down 4.1% for the YTD YoY and down 0.7% on a 52-week average YoY basis.

Imports remain very weak on the back of strong domestic production and low demand. We expect that means inventory is increasing in other regions where it has been tight. In the coming days, the technical press is to report on OPEC’s April production. We expect another MoM rise in production and for this to be reflected in a further rise global inventories.

Governmental Commission agreed upon tax breaks for high-viscosity oil

Thu, 26 Apr 2012 00:00:00 +0400

According to Interfax, yesterday the government commission agreed upon export duty relief for high viscosity oil at the level of 10% of standard export duty.

To recap, earlier the Russian government came with the initiative to introduce a new export duty relief for superviscous oil, so called ‘10-10-10’, which implied the export duty for oil with viscosity exceeding 10 thousand centipoises to be 10% of the normal export duty rate for 10 years. We believe that none of the Russian companies currently produces significant volumes of this type of oil. However, we admit that the new legislation might indeed help to promote the development of additional reserves of crude oil with the required characteristics. We see no immediate effect from the news.

Social tax rate to stay at 30%

Thu, 26 Apr 2012 00:00:00 +0400

Vedomosti reports that yesterday the government decided to leave social tax at 30% plus 10% for salaries above the threshold, during the meeting with Prime Minister Vladimir Putin, concerning guidance on tax and tariffs policies for 2013-15.

This is a well balanced decision between the planned return of the social tax rate to 34% and MinEconomy’s proposal to cut it to 26-28%. 30% seems to be acceptable for the corporate sector and it is still higher than 26%, which existed prior to the hike in pensions in 2009-10. The recent decisions on the social tax and on amendments to the Federal budget suggest that the government adheres to a rather conservative fiscal policy.

This week’s EIA data

Thu, 26 Apr 2012 00:00:00 +0400

This week’s EIA data recorded yet another bigger than expected build in crude inventory, despite the inventory draw reported by the API the day before. That kept crude inventory levels above the prior five-year range. There might be an element of seasonal stockpiling taking place, as the summer driving season approaches. However, demand remains very lacklustre as this week’s numbers remind. This was a bearish data set, we believe, contrary to the reiteration of bullish calls by certain competitors.

There were WoW falls in implied demand across the board, bar the volatile other products category which gained 22.2% WoW (0.7mmb/d) and prevented all product demand from dropping below the five-year range. All product demand fell 0.1mmb/d WoW, and is down 4.2% YoY, down 5.0% for the YTD YoY and down 3.3% on a 52-week average YoY basis (Figure 2). Gasoline and distillate demand fell WoW despite on road prices having both rolled over, as crude feedstock prices have eased and as crack spreads narrowed.

US crude production picked up an impressive 0.1mmb/d WoW, taking it to 6.1mmb/d. This level of output was last reached in November 1999.

We expect strong domestic production and weak demand to keep crude imports low, implying a rise in inventory in other regions where inventories are currently tight, and allowing the likes of China to fill their expanded strategic reserves capacity. We believe this process is already pressurising the Brent price and we expect it to continue to do so.

Ministry of Finance releases draft of amendments to Federal Law on the 2012-14 budget

Wed, 25 Apr 2012 00:00:00 +0400

The Ministry of Finance has published draft amendments to the Federal Law on the 2012-14 budget. The key takeaway is the virtually zero deficit in 2012 (-0.1% of GDP), mainly due to the 7.6% increase in total revenues (to RUB 12,678bn). In addition, expenditures are expected to add a marginal RUB 89bn to RUB 12,745bn, and nominal GDP is to be 3.2% higher at RUB 60,590bn.

Shale gas is not about to transform the European gas market

Wed, 25 Apr 2012 00:00:00 +0400

The collapse of US gas prices to less than USD 2/mmbtu (USD 71/kcm) and recent newspaper articles touting shale gas production in Europe and large scale export of US gas has increased concern that the pricing and sales volume of Russian gas to Europe are under renewed threat. They are not, in our view. European markets are currently challenging as a result of a lack of demand, not changes in supply driven by shale gas, we believe.

While the rise of LNG has improved the connectivity of global gas markets, they remain highly segmented and are likely to remain so because of the issues around gas transport. Global gas prices continue to vary widely and price movements are often quite independent of each other.

Since last year, shale gas exploration drilling has proved disappointing, Poland has slashed its estimated shale resource base and Bulgaria has banned fracking.

US prices have collapsed, but as dry shale gas drilling needs around USD 5/mmbtu (USD 177/kcm) to generate a full cycle return, gas drilling in the US is starting to fall and we believe it is only a matter of time before prices begin to correct upward. Because of the costs involved in LNG, a USD 5/mmbtu price in the US would translate into a cUSD 400/kcm price delivered to Europe, or around the same as we expect the European oil linked contract price to trend to over time. In the meantime, Europe’s gas import requirement is likely to grow at 10-15bcm/a, we estimate, and in the near term the LNG market is set to tighten. We remain of the view that contract pricing around the USD 400/kcm mark is sustainable and that Europe is likely to need more, not less, Russian gas in the future.

GDP growth slowed to 4.0% YoY in 1Q12

Tue, 24 Apr 2012 00:00:00 +0400

According to the Ministry for the Economy, real GDP added 4.0% YoY in 1Q12, decelerating from the official 4.8% YoY growth in 4Q11. Monthly GDP increased only 3.2% YoY in March (decreased 0.6% MoM seasonally adjusted), slowing from the strong 4.8% YoY growth in February, as previously estimated by MinEconomy. The Ministry estimates that in March, fixed capital investments decreased 1.1% MoM, seasonally adjusted, and expects them to rebound in 2Q12.