Russia to cut oil output in response to price cap by west

Russia will cut oil production from next month in response to the price cap imposed by western nations, the country’s top energy official said, in the first sign Moscow is moving to weaponise oil supplies after slashing natural gas exports to Europe last year.

The cut of 500,000 barrels a day, the equivalent of about 5 per cent of Russia’s production or 0.5 per cent of world supply, will help “restore market relations”, Alexander Novak said in a statement on Friday.

The announcement comes days after the latest EU sanctions and other western measures against the Russian oil sector took effect in retaliation for Moscow’s full-scale invasion of Ukraine and just two weeks before the one-year anniversary of the start of the war.

The EU extended its ban on seaborne imports of Russian crude to cover refined fuels such as diesel and petrol on February 5, while the G7 simultaneously imposed a price cap on the same fuels buyers must abide by if they are to access western tanker and insurance markets.

Novak, who is deputy prime minister and leads Russia’s negotiations with the Opec+ group of oil producers, has long warned that Moscow could retaliate against western measures designed to hit its oil revenues.

“Russia believes the price cap mechanism for selling Russian oil and oil products interferes with market relations,” Novak said. “It continues the destructive energy policy of the countries of the collective west.”

Brent crude, the international benchmark, jumped 2.3 per cent to $86.43 a barrel immediately after the announcement on Friday, having earlier traded largely flat on the day.

Oil prices surged to $139 a barrel — the highest level since 2008 — shortly after Russia’s full-scale invasion of Ukraine last year, but have fallen back in recent months as the impact of western sanctions on the amount of Russian oil reaching the market was more limited than expected.

The G7 price cap is partly designed to keep Russian oil in the market to avoid the economic damage of disrupting exports from one of the world’s largest oil exporters, but at a lower price.

But the cuts announced by Moscow will raise concerns that Russia is moving to weaponise oil supplies after slashing natural gas exports to Europe last year in response to western backing for Ukraine, triggering an energy crisis and record fuel prices across the continent.

Until Friday Russia had broadly tried to maintain oil exports, which provide more government revenues than gas. But analysts warned that it may be struggling to sell all its oil as the west steps up its sanctions.

European natural gas prices have also fallen sharply in recent months, leading some figures in the energy industry to argue that Russian president Vladimir Putin has “lost the energy war”.

Russia has warned that it could respond to the oil price cap and has said it will not deal with buyers who formally use it. Its main export crude Urals, however, has fallen to a large discount below $60 a barrel as it tries to find new buyers in Asia, meaning it already prices below the cap.

“It’s been threatened for a long time in response to the western measures like the price cap,” said Amrita Sen at Energy Aspects.

“Given Russia’s crude has fallen to steep discounts in international markets it makes sense from Moscow’s point of view to try to maximise revenues by cutting production to tighten the market and boost the price.”

Christyan Malek, global head of energy strategy at JPMorgan, said the move would “be viewed in some quarters as Russia starting to weaponise oil”.

“But there is arguably also a more practical market-driven reason. There’s a lot of ‘dark inventory’ out there stemming partly from Russia rerouting its exports away from Europe to Asia so they want to make sure the market is not too oversupplied.”

Opec, which has partnered with Russia since 2016 to manage oil production, had no immediate response to Moscow’s announcement.

One Gulf Opec source said the group, which angered Washington when it announced it was reducing supply last October to try to support the market, was unlikely to respond.

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

Three people with knowledge of discussions said Saudi Arabia, Opec’s most powerful member, had been informed in advance.

There was no immediate response to queries from the Saudi Arabian energy ministry.

Novak said Russia had no problem selling its oil but industry analysts have been predicting exports would eventually fall as sanctions tighten, potentially mitigating part of the market reaction.

“We expected higher but involuntary cuts resulting from logistical barriers,” said Ron Smith, oil and gas analyst at Russian bank BCS Global Markets.

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

This post is originally appeared on FT

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