Russia Reduces Oil Production by 5% Amid Sanctions Impact
Russia will reduce crude oil production by 500,000 barrels per day beginning in March, roughly two months after the major economies of the world imposed a price ceiling on the country’s seaborne exports.
Russian Deputy Prime Minister Alexander Novak said in a statement, “We will not sell oil to those who directly or indirectly adhere to the price ceiling principles.”
“In March, Russia will reduce production by 500,000 barrels per day in response to this. This will help to restore market relations.”
The reduction is roughly equivalent to 5% of Russian oil production.
Futures prices for Brent crude, the global benchmark, increased 2.7% to $86 (approximately Ksh10,752) per barrel as traders anticipated a reduction in global supply.
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Russia reportedly decided to reduce its output without consulting the OPEC+ group of producers, which includes Saudi Arabia. Since deciding in October to reduce output by 2 million barrels per day, OPEC+ has not changed its position.
As part of unprecedented Western sanctions aimed at reducing Moscow’s ability to fund its war in Ukraine, the European Union agreed in June 2014 to phase out all seaborne imports of Russian crude oil over the subsequent six months.
To tighten the screws further, the G7 and European Union agreed in December to cap the price at which Western brokers, insurers, and shippers can trade Russia’s seaborne oil for other markets at $60 (approximately Ksh.7,504) per barrel.
Earlier this month, EU countries also banned diesel and refined oil imports from Russia.
Novak cautioned that the crude oil price ceiling could result in “a reduction in investment in the oil sector and, consequently, an oil shortage.”
On Friday morning, Russian Urals crude traded at a discount to Brent crude of $28 (approximately Ksh.3,501) per barrel.
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In recent months, India and China have purchased cheap oil from Moscow, while the EU, formerly Russia’s largest customer for crude, has ceased imports.
A potential decline in the global oil supply could occur at an inconvenient time. The rapid reopening of China’s economy in December, following nearly three years of strict coronavirus restrictions, has increased estimates for global oil demand.
The International Energy Agency predicted last month that global demand would increase by 1.9 million barrels per day to reach a record-breaking 101.7 million barrels per day, with China accounting for nearly half of the increase.
In addition to the crushing cost of war, Western sanctions are weighing on Russia’s economy.
Last year, the nation’s budget deficit ballooned to $45 billion (approximately Ksh.5.6 trillion), or 2.3% of its gross domestic product.
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