Russian oil producers batten down the hatches on crude outlook

After reaching record-level highs in 2008 – up to $147 a barrel – the price of oil is now down under $40. Russian production has fallen, too – for first time in decade, with further declines anticipated.

The downside of the oil spike has seen crude fall more than 70% from its July highs. Year old forecasts for $200 barrels stretch credulity in the face of prices which have gone below $35 in recent weeks. With negative economic growth numbers expected out of the U.S. and Europe, analysts don't see higher prices anytime soon. Ron Smith, Head of Research, at Alfa-Bank, says there may still be more downside.

“Right now it's looks like we're probably going to be around $40 – plus or minus. That's the current balance we're seeing on the market. The market, in this case, knows best. However, we think in the first quarter and in the first half of the year, oil prices are likely to be weaker than they are now – as low as $30 even.”

OPEC has agreed to cut production by 4.2 million barrels per day in an attempt to put a floor under prices. But although they were unveiled in October and December 2008 that aren’t expected to be felt in the marketplace for another month or two.

It’s a radically changed environment for Russian oil companies planning their 2009 business plans. Rosneft is forecasting 2% production growth for the year – down from 9% in 2008. Lukoil will be looking for better margins downstream according to Mikhail Zanozin, Oil and Gas Analyst, at Uralsib.

“Rosneft will concentrate mostly on production targets and introducing its huge debt position, which is currently about $26 billion. Lukoil is looking mostly for downstream segment to produce and sell products, and maintain its production at current levels.”

Russia's oil and gas condensate output fell 0.7% in 2008 compared with 2007. However, longer-term, pipeline operator Transneft says Russian oil production could rise by around 13 percent by 2012.