Beginning in March, Russia will reduce its daily oil output by 500,000 barrels, or around 5% of current levels. Aleksandr Novak, the deputy prime minister of Russia, made this announcement on February 10—a few days after the G7 nations, the European Union, and Australia agreed to a price cap for Russian oil of $60 per barrel. Also, the EU had placed an embargo on Russian oil supplies arriving by sea. On February 5, the EU restricted buying of Russian diesel and other petroleum products.
According to analysts, the long-term effects of a one-time reduction in Russian oil output are improbable, but prices may rise if production continues to fall. This is especially true given the anticipated rise in oil demand following the relaxation of China’s coronavirus restrictions.
EU limitations have yet to impact Russian oil production
Russia’s oil production, the country’s main source of revenue, was unaffected by Western sanctions last year for invading Ukraine. Moreover, the average daily output in the Russian Federation grew to 10.7 million barrels in 2022, up 1.5% from 2021. Russia successfully transferred the oil the West refused to buy to other nations, particularly India and China.
Due to pricing limitations, Moscow finds it challenging to continue existing levels of delivery due to pricing limitations. Due to the restrictions, Russian oil producers are forced to sell their products at steep discounts, and a lack of tankers also raises the cost of insurance and charter.
Russia aims to make the oil market a seller’s market rather than a buyer’s by reducing production.
Russia lacks oil ships and storage facilities
Although Russia claims the output cuts were voluntary, many analysts think Moscow was compelled to do so due to the sanctions. While tankers must spend more time at sea making deliveries to farther-flung locations in Asia, where the Russians are rushing to find new consumers, Russian oil producers need more storage capacity for their products.
Russia lacks adequate storage facilities at home, and it is expensive to store Russian oil overseas in locations like Fujairah in the United Arab Emirates, where Russian oil stocks are rising. It appears that Russia has estimated how much oil and oil products can be sold to price-cap countries and has decided to cut oil production by an appropriate amount so that Russian oil exports are limited to India, China, Turkey, and other nations that have not ratified the price ceiling.
Russia’s oil and gas earnings nearly fell in half in January
The Russian Federation’s January budget deficit, the highest deficit in recent years at 23.4 billion euros, increased. Western oil sanctions are among the key causes. The Russian Ministry of Finance reports that oil and gas sales have decreased by 46%, or nearly half, since January of last year.
Russia is interested in a large rise in oil prices in this regard. Countering the drop in exports would boost Moscow’s earnings and cause problems for Western countries already dealing with inflation.
Moscow has room to cut production even more, though. Russian output was 10.9 million barrels per day at the beginning of February, compared to a basic budget expectation of 9.8 million barrels per day.
The output reduction that is scheduled for March could be the start of an effort to squeeze the oil market.
A partial attempt to utilise Gas as a weapon
The West has already charged Russia with using natural gas as a weapon. In 2017, Gazprom discontinued most of its supply to Europe due to technical and cash flow issues.
In Europe, Moscow saw this as an effort to utilise its status as the EU’s top natural gas supplier as payback for backing Ukraine. Around 45% of the gas imported by the EU in 2021, including liquefied natural gas, came from Russia. Due to this, gas prices have increased to previously unheard-of heights, driving inflation and jeopardising the EU’s post-pandemic economic recovery. Yet, the unpleasant effect was mostly fleeting.
With supplies from the United States, Norway, and Qatar, Europe has been able to replace a large portion of its reliance on Russian gas, easing concerns about future interruptions and power rationing. Due to warm weather and lower use, gas costs have significantly decreased, but they are still significantly higher than in early 2021.
Because the effects of using oil can be highly transient, Russia may be reluctant to use it as a weapon. At the same time, the drop in gas supply just affected Europe, yet there is a global issue with oil supply.
Will OPEC be able to stop Russia from manipulating oil prices?
Russia will find it much harder to gain from the leverage of oil now that “black gold” is more fungible and widely accessible. Finding alternatives for suppliers becomes considerably simpler for nations as a result.
Moreover, OPEC Plus, including the Russian Federation, has decided not to restore the volumes immediately lost due to Moscow’s unilateral move, which caused Brent crude prices to rise above $85 per barrel.
But OPEC’s stance might shift if Russia uses additional production cutbacks, as this could raise oil prices to a point where they threaten demand.
It depends on how OPEC will respond to make up for the volumes.