Russia announced it would cut oil production by 500,000 barrels a day in March after the West imposed price caps on Russian oil and oil products.
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Bans and price caps on Russian oil are having the “intended effect” according to the International Energy Agency’s Toril Bosoni, despite surprisingly robust production and exports in recent months.
The European Union embargo on Russian oil products went into effect on February 5 and builds on the $60 oil price cap introduced by the major economies of the G-7 (Group of Seven) on December 5.
Bosoni, head of the IEA’s oil industries and markets division, told CNBC on Wednesday that Russian oil production and exports have held up “much better than expected” in recent months. This is because Moscow has been able to divert much of the crude oil that previously went to Europe to new markets in Asia.
Notably China, India and Turkey increased their purchases to partially offset a 400,000 bpd drop in Russian crude oil exports to Europe in January, according to the IEA’s oil market report released on Wednesday. Some Russian oil also reaches Europe via the Druzhba pipeline and Bulgaria, both of which are exempt from the EU embargo.
As a result, Russia’s net oil production in January fell just 160,000 barrels a day from pre-war levels, with 8.2 million barrels of oil shipped to global markets, the IEA said. The agency added that the G-7 price caps could also help bolster Russian exports to some extent, as Moscow is forced to sell its Ural oil at a lower price to those countries that comply with the caps, which it is possibly more attractive than other makes crude oil wells.
Despite the sizeable volume of Russia’s exports, Bosoni argued that this does not mean the sanctions have failed.
“The price cap was put in place to allow Russian oil to keep flowing into the market while reducing Russian revenues. Although Russian production is coming to the market, we see that the revenue that Russia is getting from oil and gas is really down,” Bosoni said.
“For example, export earnings for Russia in January were about $13 billion, down 36% from a year ago,” she said. “Russian tax revenues from the oil industry fell by 48% over the year, so with that in mind we can say the price cap is having its intended effect.”
She also highlighted the growing discrepancy between Russian Ural crude oil prices and international benchmark Brent crude oil. The former averaged $49.48 a barrel in January, according to Russia’s Finance Ministry, while Brent traded above $85 a barrel on Thursday.
Importantly, Russia’s 2023 budget is based on an average Ural price of $70.10/barrel, leaving a significant hole in public finances as tax revenues from oil production fall every year.
Bosoni also noted that there are signs Moscow may not be able to redistribute trade in oil products in the same way as crude oil exports, which is why the IEA expects exports and production to continue falling in the coming months.
“We are now seeing some redistribution of product trade, but we haven’t seen the same shift as in crude oil, which is why we expect Russian exports and production to fall,” she said.
production cut
Russia announced last week that it would cut production in March by 500,000 barrels a day, about 5% of its recent crude production, in response to the latest round of Western bans.
However, Bosoni said this is in line with the IEA’s expectations.
“This is reflected in our balance sheets which still see the markets relatively well supplied in the first half of the year so we are not overly concerned about this drop, we believe there is enough supply to meet demand for the coming months “, she said .
“The question will be when summer comes, refining activity picks up to accommodate summer drives and the recovery in China really starts, then we can see the market really tighten up for the rest of the year.”
In its report, the IEA hinted that the production cut may be less retaliatory and more an attempt by Moscow to prop up prices by cutting output rather than continuing to sell at a big discount to countries that don’t 7-comply with price caps.
World oil demand
Global oil demand growth is expected to pick up in 2023 after a sharp slowdown in the second half of 2022, with China accounting for a significant portion of the projected surge.
The IEA said a sharp increase in air travel in recent weeks has highlighted the pivotal role of jet fuel shipments for growth in 2023. Oil supplies are expected to increase by 1.1 million barrels per day to 7.2 million barrels per day over the course of 2023, with aggregate demand reaching a record 101.9 million barrels per day.
The impact of the West’s recent oil embargo and price cap will be a key factor in meeting this demand growth, the IEA report noted.
“The same goes for Beijing’s stance on domestic refining activities and product exports as it reopens. New refineries in Africa and the Middle East and China are expected to step in to meet growing demand for refined products.
“If the product price cap is half as successful as the crude oil cap, product markets could weather the storm just fine – but more crude oil shipments would be needed to prevent renewed destocking later in the year.”
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