Russia said it would cut its roughly 10 million b/d oil production by 5% in retribution of Western sanctions amid the Kremlin’s nearly year-long war in Ukraine.
The decision follows steps by Russia in 2022 to slash the bulk of natural gas exported via pipeline to the European Union (EU) – moves that hastened calls across the continent for U.S. supplies of LNG to fill the void. Europe had depended on Russian exports prior to the war. In the months leading up to winter, U.S. shipments of liquefied natural gas reached record levels to meet robust European demand. Exports have leveled off but remain elevated this year.
“Today, we are fully selling the entire volume of oil produced; however, as previously stated, we will not sell oil to those who directly or indirectly adhere to the principles of the ‘price ceiling,’” Russian Deputy Prime Minister Alexander Novak said, according to state news service TASS. “In this regard, Russia will voluntarily reduce production by 500,000 barrels a day in March. This will help restore market relations.”
Novak referred to EU price caps on Russian oil that followed other sanctions aimed at crippling Russia’s energy complex – the centerpiece of its economy – and its ability to finance its invasion of Ukraine.
The EU and the Group of Seven nations (G-7), which includes the United States, levied a series of sanctions against Russia over the past few months, including an EU ban on most Russian crude imports and the global price ceiling on Kremlin-backed oil that Novak called out. The price cap was set at $60/bbl, far below the $86 level at which Brent crude, the international benchmark, traded on Friday.
The United States previously banned imports of Russian fossil fuels.
Analysts at ClearView Energy Partners LLC said the Kremlin could take further action in the near future to reduce supplies, bolster demand and support prices. “Moscow may also be waiting to see how the announced crude cut plays out, but a further reduction in products over and above embargo/cap-related dislocations could lead to additional market tightness,” they said Friday.
Russia’s latest retaliatory action follows a move by its partners in OPEC-plus to scale back production by up to 2 million b/d. The Saudi Arabia-led cartel implemented that policy in November and said recently it would continue it indefinitely.
OPEC-plus said it curtailed output in response to global recessionary headwinds and threats to demand. But ClearView analysts at the time interpreted the move as an effort to bolster prices by pushing supply/demand out of balance with a steep reduction. In fact, OPEC researchers estimated in their January oil market report that global crude demand would expand by 2.2 million b/d this year. They cited China’s eased pandemic-era travel restrictions and expectations for a surge in demand there.
Goldman Sachs Group analysts said in a report they also are looking to China to lead consumption this year. “We still see the China comeback as the most persistent driver of the outlook,” they said.
However, if that does not materialize, further OPEC-plus cuts are in the cards this year, according to the Goldman team.
American producers, meanwhile, are forging ahead on crude production to balance supply/demand.
The U.S. Energy Information Administration (EIA), in its latest Weekly Petroleum Status Report covering the week ended Feb. 3, said domestic production rose 100,000 b/d from the prior week to a pandemic-era high of 12.3 million b/d. The latest print also marked a 100,000 b/d increase from January’s average.
Additionally, production for the latest EIA period far exceeded the year-earlier level of 11.6 million b/d, and it climbed further toward the record of 13.1 million b/d set in early 2020, prior to coronavirus outbreaks.
