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Russia Retaliates For Sanctions By Announcing Oil Output Cut

The move threatens to renew turmoil in the oil market, which had so far taken disruption to Russian supplies in stride.

Russia Retaliates for Sanctions By Announcing Oil Output Cut
Russia Retaliates for Sanctions By Announcing Oil Output Cut

Russia plans to cut its oil output by 500,000 barrels a day next month, following through on a threat to retaliate against western energy sanctions and sending oil prices sharply higher.

The move threatens to renew turmoil in the oil market, which had so far taken disruption to Russian supplies in stride. Delegates from other members of the OPEC+ coalition signaled they won’t boost production to fill in the gap.

Crude prices jumped on the news, with global benchmark Brent trading 2.2% higher at $86.34 a barrel by 12:22 p.m. in London. Prior to this week, the international benchmark had dropped 9% since mid-January, helping to ease inflationary concerns.

Russia’s reduction is equivalent to about 5% of its January output. The Kremlin has repeatedly hinted at such a move since the European Union and the Group of Seven industrialized countries began discussing capping the price of Russian crude and refined product exports amid the war in Ukraine. 

“Russia believes that the mechanism of price caps on Russian oil and petroleum products is an intervention in market relations and an extension of destructive energy policies of the collective West,” Deputy Prime Minister Alexander Novak said in a statement on Friday. His press service confirmed that crude output will be affected by the cuts. 

Moscow’s move deepens the 2 million barrel-a-day supply curbs announced late last year by OPEC+, which Russia leads along with Saudi Arabia. At a committee meeting earlier this month, ministers from the group saw no need to change their production limit, which lasts until the end of 2023.

Since the imposition of EU import bans and the price cap “most observers expected some output loss, and Moscow may just be attempting to portray a compulsory cut as a voluntary policy choice,” said Bob McNally, president of Rapidan Energy Group and a former White House official. “I doubt Russia’s OPEC+ partners were taken by surprise and do not expect the supply reduction will alter their ‘stay put’ policy stance.”

Russia Retaliates For Sanctions By Announcing Oil Output Cut

In the short term there is nobody to fill the supply gap created by the Russian cuts, said Giovanni Staunovo, an analyst at UBS Group AG. 

As of now, Russia is able to sell its oil volumes to foreign markets, but it does not want to adhere to the price restrictions imposed by Western nations, according to Novak. “When making further decisions, we will act based on how the market situation is developing,” he said. 

Market Outlook 

The Russian cuts are unlikely to affect global oil prices in the longer term, according to Viktor Katona, crude analyst at Kpler. The reduction so far has only been announced for March and Russia’s output could rebound after that, he said. 

Given the nation’s ability to export crude amid sanctions, the production cuts may lead to lower refinery runs while supplies to foreign clients could remain robust, Katona added.

It also might take longer than a month for Russia to redistribute the crude oil and product volumes that have been freed up as a result of Europe’s import bans, said Sergey Vakulenko, a veteran Russia oil expert with the Carnegie Endowment for International Peace. 

“Then Russia might continue the production cut and accompanying PR campaign,” he said. 

Falling Revenues

Russian oil production has been surprisingly resilient, amid several waves of energy restrictions imposed by western nations and their allies. 

Since hitting a post-invasion low of 10.05 million barrels a day in April, Russian oil output rebounded to around 10.9 million at the end of 2022. It stayed close to that level in January, despite the European Union’s ban on most seaborne imports of the country’s crude on Dec. 5.

Still, Moscow’s oil revenue has taken a hit in recent months amid the price caps and generally lower global crude prices. The discount at which Urals crude — Russia’s main export grade — trades to the international benchmark has also widened, as the country seeks out new markets and alternative methods of shipment in the face of sanctions. 

(Updates with additional context throughout.)

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