Just before announcing a 500,000 bpd production cut, Russia’s Deputy Prime Minister Alexander Novak had warned that there was a risk of lower oil production this year. That risk, Novak said, was due to the EU import bans and the price caps on Russian crude and petroleum products.
“Yes, there are such risks. But we will assess them in the near future,” Novak told reporters, as carried by Russian news agency TASS.
Until today’s announcement, Russia’s oil production and exports had held resilient, defying early expectations of a plunge in supply after the West agreed to impose sanctions on Russian oil in an effort to cut Vladimir Putin’s revenues from energy sales.
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Novak had said earlier that Russian oil production held at 9.8-9.9 million barrels per day (bpd) in January 2023, close to the levels from November and December 2022, just ahead of the EU embargo and the price cap on crude imports. Russia maintained output in the first week of February, too.
Meanwhile, Russia’s budget revenues are sinking due to the low prices of its flagship Urals blend.
The discounts at which Russian oil is being offered have led to the price of Urals dropping to around $30 per barrel below the international benchmark, Brent Crude.
Due to the low price of Urals in January, Russia’s budget was $24.7 billion (1.76 trillion rubles) into deficit in January, compared to a surplus for January 2022, as state revenues from oil and gas plunged by 46.4% due to the low price of Urals and lower natural gas exports, the Russian Finance Ministry said in preliminary estimates this week.
Russia is considering taxing its oil firms based on the price of Brent – instead of Urals – to limit the fallout on the budget revenues due to the widening discount of Urals to Brent, Russian daily Kommersant reported last week, quoting sources.
In the budget estimate for January this week, the Finance Ministry confirmed parts of this report, saying that “considering the fact that the relevance of the price of Urals in calculating export prices has diminished, various other approaches are currently being studied to switch to alternative price indicators for tax purposes.”
There are, of course, plenty of reasons for Russia to want to boost oil prices, and it appears OPEC+ isn’t going to resist those efforts. But regardless of what other factors are at play, it certainly seems that sanctions, embargoes, and price caps are finally pushing Russian production lower.