Russia cuts oil production in response to Western countries’ price cap

Russia will cut oil production from next month in response to a price cap imposed by Western nations, the country’s top energy official said, in the first sign that Moscow is seeking to weaponize oil supplies after cutting natural gas exports to Europe last year.

The reduction of 500,000 barrels per day, which corresponds to almost 5 percent of Russian production, or 0.5 percent of world supply, was a response to “the destructive energy policy of the countries of the collective West,” Aleksandr Novák said on Friday. .

Christyan Malek, global head of energy strategy at JPMorgan, said Moscow’s move “will be seen in some quarters as Russia starting to weaponize oil.” But he added that a more practical reason may be to prevent the market from becoming “excessively oversupplied” as Russia diverts exports from Europe to Asia.

Novak’s announcement comes amid heightened tensions between Moscow and the western mountain, two weeks before the first anniversary of Vladimir Putin’s full-scale invasion of Ukraine.

Russia launched a major airstrike against Ukraine on Friday and a missile crossed Moldova’s airspace, as expectations of a new Kremlin offensive grew. Moldovan Prime Minister Natalia Gavrilita has resigned a day after the country’s intelligence service said Russian security services were seeking to undermine the former Soviet state.

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Until Friday, Russia had largely tried to maintain oil exports, which provide more state revenue than gas. But analysts have warned that it may struggle to sell all of its oil as the West tightens its sanctions.

Brent crude, the international benchmark, jumped 2.3 percent to $86.43 a barrel immediately after Novak’s announcement, after trading roughly unchanged earlier in the day.

Novak, Russia’s deputy prime minister and chief negotiator of the OPEC+ oil-producing group, cited international measures taken against Russia in response to the invasion as the reason for the reduction.

On February 5, the EU extended a ban on sea imports of Russian crude to include refined fuels such as diesel and gasoline, while the G7 simultaneously imposed price caps on those fuels that will be binding on buyers entering Western tanker and insurance markets.

“Russia believes that the price cap mechanism for the sale of Russian oil and oil products interferes with market relations,” Novak said. “It continues the destructive energy policy of the countries of the collective West.” He added that Russia’s planned oil cuts would help “restore market relations.”

But further cuts in oil production could risk alienating major oil importers such as China and India, which are aligned with Russia but sensitive to rising oil prices.

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The G7’s price cap was designed in part to keep Russian oil on the market to avoid economic damage from cutting off exports to one of the world’s biggest oil exporters, but at a lower price that would hit Moscow’s budget.

The Russian government’s oil and gas revenues fell 46 percent year-on-year in January, contributing to a rapidly widening budget deficit that hit $25 billion for the month as the Kremlin ramps up defense spending.

Pierre Andurand, one of the world’s top-performing traders in the sector, claimed that Putin had already “lost the energy war”.

Oil prices rose to $139 a barrel shortly after the invasion began, but have fallen in recent months. While the Kremlin’s cut in natural gas exports to Europe triggered an energy crisis and record fuel prices last year, gas prices have also fallen since then.

Russia has warned that it will not deal with buyers who officially apply the oil price ceiling. But Urals, a major crude oil export, has fallen significantly below the $60-a-barrel ceiling as the country tries to find new buyers in Asia.

“With Russian crude falling sharply on international markets, it makes sense from Moscow’s perspective to try to maximize revenue by cutting production to tighten the market and raise the price,” said Amrita Sen of consultancy Energy Aspects.

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Opec, which has partnered with Russia to manage oil production since 2016, did not immediately respond to Moscow’s announcement.

A Gulf OPEC delegate said the cartel, which angered Washington when it agreed to cut global supply last October, is unlikely to adjust production to offset the Russian cut.

Dmitry Peskov, Putin’s spokesman, told reporters that Russia had discussed its decision to cut production with “several” Opec+ members before announcing the move.

Three people familiar with the talks said Saudi Arabia, Opec’s most influential member, had been briefed in advance.

There was no immediate response to questions from the Saudi Energy Ministry.

Jorge León, vice president of energy analyst Rystad, said that as early as March, the market expected Russian oil production to fall by 300,000 to 500,000 barrels per day, as it was difficult to find new buyers for its refined products.

“It may not be a ‘voluntary’ cut,” he said, adding that Moscow likely preferred to announce it would cut production rather than suffer a downturn due to sanctions.

Additional reporting by Samer Al-Atrush in Riyadh, Tom Wilson in London and Max Seddon in Riga

Source: https://www.ft.com/content/dc898690-653a-47f1-af56-b0216abd7dcd