- Russia announced on Friday that it would cut crude oil production by 500,000 barrels a day in March.
- The move followed Moscow’s vow to retaliate against EU price caps on its crude and refined petroleum products.
- Russia is also likely to cut supplies because it is struggling to sell its oil, according to ING.
Russia’s shrinking oil supply may not be what it’s supposed to be.
The Kremlin’s announcement of a Reduction of crude oil production by 500,000 barrels per day — the equivalent of about 5% of Russia’s output in January — has sparked fears that the country could militarize its energy supplies in retaliation for Western sanctions over the war in Ukraine.
But it’s also likely that Russia’s cut in supply in response to weak demand, ING’s commodities strategists wrote in a Monday note.
“We think it’s more likely that Russia is simply struggling to find buyers for its oil, especially after the EU embargo on Russian refined products came into effect earlier this month.” , according to ING analysts Warren Patterson, head of the bank’s commodities strategy. , and Ewa Manthey, commodity strategist.
And even if the EU was stock up on russian crude Ahead of a fuel ban on Dec. 5, Russian crude oil exports came under pressure after the ban took effect, alongside a $60-a-barrel price cap on fuel.
Data from S&P Global showed that Russia’s maritime crude exports actually fell to their lowest level in two years in December, the publication reported on January 3.
In February, the EU imposed a similar ban and price cap on imports of Russian refined petroleum products.
Russian President Vladimir Putin criticized this oil price cap and called it “stupid.“He also reported three potential methods of retaliation – including a cut in oil production, announced by Russian Deputy Prime Minister Alexander Novak on Friday, according to TASS news agency.
“We will not sell oil to those who directly or indirectly adhere to the price cap principles,” Novak said, according to TASS. “In this regard, Russia will voluntarily reduce production by 500,000 barrels per day in March. This will help restore business relations.
Oil futures jumped more than 2% after the news broke – but those gains were partly reversed. On Monday, US benchmark West Texas Intermediate crude oil futures were down 0.9% at $79.04 a barrel, while international benchmark Brent crude was down 0.8% at 85 $.74 a barrel as of 3:08 a.m. ET.
“The weakness we are seeing today in early morning trading prices likely reflects the market realizing that these cuts are already largely priced in,” ING strategists wrote in their Monday note.
Despite Moscow’s retaliatory measures, the sanctions seem to be working: Russia’s oil revenues has already fallen by almost 50% in January 2023 compared to a year ago, The Russian Ministry of Finance said on February 6.
Russia’s flagship Urals oil is trading at a $38 a barrel discount to Brent oil on Feb. 8, according to S&P Global Dishes. This discount is more than three times that of the $11 per barrel observed on February 24, 2022 — the day Russia invaded Ukraine — according to the Price Tracking Agency.
Russian oil prices have been depressed even as the country redirected its maritime exports to Asia – particularly to India and China – after the loss of the EU, its biggest energy customer.
However, the two price-sensitive countries have been demand huge discounts, according to a Bloomberg report on November 27.