Is Russia Hedging Its Bets On India And China?

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Includes: BNO, DBO, DNO, DTO, DWT, OIL, OILK, OILX, OLEM, OLO, SCO, SZO, UCO, USL, USO, UWT
by: Gaurav Agnihotri

Summary

Russia’s energy minister Alexander Novak says that global crude oil output was reduced by 1.4 million barrels per day in January 2017.

Russia has become the biggest crude oil supplier to China.

Russia is expanding its presence in India's booming oil market.

Looking at the latest OPEC-non OPEC compliance levels, it can be clearly seen that Russia has been one of the biggest supporters of the oil deal. On December 10th, OPEC and some key non- OPEC players signed their first oil production agreement in Vienna after a gap of fifteen years. The 11 non OPEC members agreed to reduce their combined oil production by 558,000 barrels per day. Out of this, Russia agreed to reduce around 300,000 barrels per day by March 2017. In total, both OPEC and non - OPEC players had agreed to reduce their production by 1.8 million barrels per day by the first half of 2017. On Wednesday, February 1st, Russia's energy minister Alexander Novak said that global crude oil output was reduced by 1.4 million barrels per day in January 2017. "Some countries have cut more than was planned and are moving ahead of schedule. Russian oil production was down by 117,000 bpd in January. We are also noticing a significant decrease in speculative pressure to the prices" said Alexander Novak. Investors must note that oil (NYSEARCA:USO) (NYSEARCA:OIL) (DWTI) (NYSEARCA:UWTI) (NYSEARCA:UCO) (NYSEARCA:SCO) (NYSEARCA:BNO) (NYSE:DBO) has been well supported by OPEC and non OPEC players like Russia, as the group has reduced their oil production as per their commitment. In fact, one of the biggest factors behind this compliance is the cooperation between Russia and Saudi Arabia. However, things aren't as straightforward as they seem. Just as Saudi Arabia is (very smartly) preparing to increase oil pricing for its March sales to all its customers, Russia has already made a very smart geopolitical move.

Russia is looking to capture China and India's crude oil market

In my earlier article, I had stated how Russia had defeated Saudi Arabia to become the biggest crude oil supplier to China. With a growing demand for Russian crude from China's tea pot refiners and strategic reserves, Russia has won the Chinese territory which was earlier held by Saudi Arabia. This is a big geo-political victory for Russia, which produced more than 11 million barrels per day in January 2017. Besides this, Russia has another ace up its sleeves-India. India is the third biggest global importer of crude oil and buys around 80% of its total crude oil requirement from other countries. With a demand of around 4.33 million barrels per day, India's oil demand growth rate (13% year-on- year as on 2016) is even higher than China's. In a significant move, Russia's state- owned Rosneft (ROSN) has bought a 49% stake in India's second biggest private- sector refiner- Essar Oil Limited for $13 billion (Russia's biggest outbound deal), while the remaining 49% stake has been equally bought by Russian investment fund United Capital Partners and Netherland based Trafigura Group Pte. It is interesting to note that even Saudi Arabia was eyeing a stake in Essar Oil Limited for a sum of $5.5 billion. In fact, the Rosneft-Essar deal was almost cancelled at the eleventh hour when Saudi Aramco submitted its rival bid. However, the timely involvement of India's Prime Minister Narendra Modi and Russian President Vladimir Putin salvaged the Rosneft-Essar deal after Rosneft agreed to pay $13 billion - almost double of what was originally offered to Essar. This deal is expected to be closed by March 2017 and also includes around 2700 Essar Oil gas stations. By grabbing a majority stake in India's state of the art Essar refinery, Russia has scored another major geopolitical victory over Saudi Arabia, as this will reduce the dominance of Middle East crude oil suppliers in India (which constitute around 65% of India's overall crude oil imports) over the course of time and increase Russian presence.

Conclusion

With a combined crude oil import demand of almost 11 million barrels per day, both India and China are going to drive the global demand for oil in the coming time. Looking at Russia, it can be seen that the country has been establishing its firm grip on both Indian and Chinese oil markets. In my opinion, India and China are the major factors why Russia is co-operating with OPEC in reducing its oil production. Investors must take note of this.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.