Investment in Russian oil unaffected by Middle East, says VTB

Higher oil prices do make the oil sector in Russia an attractive investment option, but uncertainty in the Middle East is not necessarily causing more capital flows into the industry, says Colin Smith, head of energy research at VTB Capital.

The price of Brent crude oil has been increasing since the beginning of the year, causing VTB to increase its 2012 forecast from $100/bbl to $105/bbl. The main impetus behind this growth is the continuing threat from Iran and Syria to close down access to the Strait of Hormuz, which acts as a passageway to a fifth of the world’s oil supply.

Around 14 crude oil tankers pass through the Strait each day on average, with a total of 17 million barrels on board according to estimates. This amounts to over a third of the world’s seaborne oil shipments. If the passage were closed, oil supply would be cut significantly and prices would be expected to shoot up.

Russia would benefit from such a turn of events, being the largest producer and exporter of oil in the world other than the Arab League. Half of its government budget is based on taxation of the oil and gas sector, so higher prices mean more political stability.

This may attract investors to the Russian oil and energy sectors, as they seek to profit from returns made by companies in the sector on the one hand and to prepare for the potential hike in prices.

Smith agrees that concerns over Iran “may increase the perceived attractiveness of Russia as a more politically stable partner with whom to do business.” But, in VTB’s view, these concerns are “likely to prove overdone,” and it expects downward pressures on oil prices as a result of excessive oil supply.

The key reasons to invest in the oil sector in Russia remain low valuations and high earnings potential. Edward Conroy, co-manager of the HSBC GIF Russia Equity Fund, says: “We view the Russian energy sector as being significantly undervalued versus global peers, and believe that initiatives such as increasing dividend yields, as we have seen from companies such as Gazprom and Lukoil should help to narrow the gap, therefore we remain overweight.”

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