Russia is slashing its oil output by 5% in retaliation to Western sanctions — but it also likely that it is struggling to find buyers in the first place
- Russia announced on Friday it will cut crude oil production by 500,000 barrels per day in March.
- The move followed Moscow's vow to retaliate against EU price caps on its crude and refined fuel products.
Russia's oil supply cut may not be what it is cracked up to be.
The Kremlin's announcement of a 500,000 barrel-per-day crude oil output cut — equivalent to about 5% of Russia's January production — ignited fears that the country is weaponizing energy supplies in retaliation to Western sanctions over the Ukraine war.
But it's also likely that Russia's cutting supply in response to low demand, ING commodity strategists wrote in a Monday note.
"We feel that it is more likely that Russia is simply struggling to find buyers for its oil, particularly after the EU ban on Russian refined products came into force earlier this month," according to ING analysts Warren Patterson, the bank's head of commodities strategy, and Ewa Manthey, a commodities strategist.
And though the EU was loading up on Russian crude in the run-up to a December 5 ban on the fuel, Russian crude oil exports came under pressure after the ban came into effect alongside as a $60-barrel price cap on the fuel.
Data from S&P Global showed Russia's seaborne crude exports actually fell to a two-year low in December, the publication reported on January 3.
In February, the EU imposed a similar ban and price cap on imports of Russian refined fuel products.
Russian President Vladimir Putin slammed this oil price cap, and called it "stupid." He also flagged three potential methods of retaliation — including an oil production cut, which Russian deputy prime minister Alexander Novak announced on Friday, according to TASS news agency.
"We will not sell oil to those who directly or indirectly adhere to the principles of the price ceiling," Novak said, per TASS. "In this regard, Russia will voluntarily reduce production by 500,000 barrels per day in March. This will help restore market relations."
Oil futures jumped over 2% after the news broke — but these gains have been partly reversed. On Monday, US benchmark West Texas Intermediate crude oil futures were 0.9% lower at $79.04 a barrel while international benchmark Brent crude was 0.8% lower at $85.74 a barrel 3.08 a.m. ET.
"The weakness that we are seeing in prices in early morning trading today likely reflects the market coming to the realization that these cuts are already largely priced in," wrote the ING strategists in their Monday note.
Despite Moscow's retaliatory measures, the sanctions seem to be working: Russia's oil revenue has already crashed by nearly 50% in January 2023 from a year ago, Russia's finance ministry said on February 6.
Russia's flagship Urals crude is trading was trading at a discount of $38 a barrel against Brent oil on February 8, according to S&P Global Platts. This discount is more than three times that of the $11 a barrel witnessed on February 24, 2022 — the day Russia invaded Ukraine — according to the price reporting agency.
The prices of Russian oil have been depressed even though the country has been redirecting seaborne exports to Asia — in particular to India and China — after the loss of EU, its single largest energy customer.
However, the two price-sensitive countries have been demanding huge discounts, according to a Bloomberg report on November 27.