Russia has announced that it will reduce its oil production by 500,000 barrels per day in February, in response to the West’s sanctions and in an attempt to protect its market share. The move sent oil prices sharply higher, with Brent rising as much as 2% to $86.50 a barrel.
Deputy Prime Minister Alexander Novak said in a statement that the mechanism of price caps imposed by the European Union and G-7 is “an intervention in market relations and an extension of destructive energy policies of the collective West.”
Russia is part of the OPEC+ group, which announced cuts of 2 million barrels a day late last year. 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. However, it appears that the Russian cuts did not come as a surprise to the other members of the group.
Bloomberg quoted Bob McNally, president of Rapidan Energy Group, as saying that Moscow may be attempting to portray the compulsory cut as a voluntary policy choice. “I doubt Russia’s OPEC+ partners were taken by surprise and do not expect the supply reduction will alter their ‘stay put’ policy stance”, added McNally.
Giovanni Staunovo, an analyst at UBS Group AG, said that there is no pressure for OPEC+ to make any changes to its production levels as a result of the Russian cuts. “OPEC+ might increase their group’s quota or unwind their cuts later this year,” said Staunovo.
The EU import bans and the price cap have driven the discount of Urals crude – Russia’s main export grade – to the international benchmark. This, combined with the decline of around $40 a barrel in Brent crude since June, has reduced Russia’s oil revenue. However, production has been surprisingly resilient. Despite the import bans, Russian production rose to 10.9 million barrels a day at the end of 2022.
Novak said that “when making further decisions, we will act based on how the market situation is developing.” It remains to be seen what the long-term impact of Russia’s output cuts will be on the global oil market, and whether the OPEC+ group will make any changes in response.
The decision by Russia to reduce its oil output has already had a noticeable impact on the global oil market, with oil prices rising significantly as mentioned above. There are a few additional potential outcomes to consider.
Firstly, the reduction in Russia’s oil production could further strain its relationship with the West and lead to additional sanctions. This could result in a decrease in Russia’s overall oil output and potentially cause a shortage in the global oil market, driving up prices even further.
Russia’s this move, on the other hand, could also be seen as a sign of strength, as the country is trying to protect its market share and defend itself against the sanctions imposed by the West. This could lead to other oil-producing nations following suit and reducing their own production, causing a decrease in the global supply of oil.
Moreover, the OPEC+ group may decide to respond to Russia’s cuts by adjusting their own production limits. This could result in a coordinated effort to control the global oil market and potentially stabilize prices. However, the long-term consequences of this move are yet to be clear.