Russia is not fairing well in the current low oil market.
Very few are, really, but Russia’s losses have been numerous indeed. Yesterday, we talked about the country’s loss of political power now that they are no longer the only oil and gas supplier to Europe and Ukraine.
Now it appears that Russia’s hopeful long-term deal with China will not be enough to make up for their losses.
In May, 2014, Russian Gazprom (MCX: GAZP) made a deal worth $400 billion in oil exports to China. This was meant to go on for 30 years beginning in 2018 when the first of the pipelines to transport the oil would be finished.
Such long term deals infer nothing but good business—in a stable market, that is. However, when this deal was made, oil prices were above $100 per barrel.
They have since dropped 56%, and many expect them to stay low for a while. Unfortunately, Gazprom’s deal did not have any protection set up against long-term low oil prices.
This means that the exports will not only be going to China at a much lower rate than Russia would usually inflate its prices to, but that Russia may actually lose money on the transaction.
In light of this, recent pipeline setbacks may actually be a boon for the former Soviet Union. An unexpected 7-month delay has pushed the date of the first oil delivery from 2018 to mid-2019 at the earliest, and may give oil prices a chance to recover in the meantime.
Gazprom, the mostly government-owned company that has lost five-sixths of its value since before the fall of oil prices, will need all the help it can get to survive the ongoing glutted oil market.
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