MOSCOW – Moscow threatened to cut oil production in response to Western price caps, setting the stage for an escalation in the energy war that was taking place parallel to the conflict in Ukraine.
In a speech on Friday on state television, Russian Deputy Prime Minister Alexander Novak outlined for the first time Moscow’s possible response to Western price caps introduced earlier this month. Mr Novak said Russia could reduce its production by 500,000 to 700,000 barrels a day by early next year – which he described as a 5% to 7% capacity reduction.
The comments come ahead of an expected announcement by Russian President Vladimir Putin early next week when he said he would sign a decree over Moscow’s response.
Mr Novak’s comments pushed global oil prices higher. Benchmark Brent crude futures rose 2.7% to $83.87 a barrel on Friday. West Texas Intermediate, the US brand, rose 2.8% to $79.69 a barrel.
“This is basically the first time we’ve heard that the Russians are willing to cut production if you want to force them to lift the price cap,” said Bob Yawger, executive director of energy futures at Mizuho Securities UNITED STATES.
Mr Yawger said it’s possible Russian officials may have considered production cuts to drive up prices with no intention of enforcing it. “But more broadly, it’s just the threat that they’re going to take kegs off the market: that’s a concern in the energy space,” he added.
On Thursday, Mr Putin said he saw no potential losses for Russia’s oil and gas sector from Europe’s price cap.
“There is no visible damage to the Russian economy, the Russian fuel and energy complex,” he told a news conference. “At this cap there are no casualties.”
Mr Putin accused the West of introducing imperialist world economic and energy policies.
Russian Deputy Prime Minister Alexander Novak outlined Moscow’s possible response to western price caps imposed earlier this month.
Photo: Akos Stiller/Bloomberg News
“What they’re trying to do now is a throwback to colonialism,” he said. “An attempt at non-market regulation in the world economy is the same attempt at robbery.”
The European Union and the United Kingdom earlier this month banned seaborne imports of Russian crude, while the Group of Seven nations limited other sales by banning Western companies from insuring, financing or selling Russian crude at over $60 a barrel to send. The measures were aimed at hitting the Kremlin’s war chest while keeping Russian supplies available on world markets.
Western countries plan to take the same steps on Russian petroleum products as diesel in February, with the EU stopping buying Russian products and the G-7 scrambling to limit the price of exports.
Helge André Martinsen, senior energy analyst at DNB Markets in Norway, said the EU’s embargo on Moscow’s oil, price cap and associated restrictions on Russian oil would reduce production next year. “The threat of a production cut is probably only Russia, which realizes that production will fall [the first half of] 2023 due to the tightening of sanctions,” he said in a note.
There is evidence that the December sanctions have already taken some Russian oil off the market – exactly what the US wanted to avoid with the price cap. Russia has been exporting about 2.7 million barrels of its crude by sea every day so far in December, according to commodities data firm Kpler. This is 17% less than the average for the first 11 months of the year.
Some western traders, banks and tanker companies say they are wary of facilitating Russian oil supplies even within the price cap, partly because of perceived sanctions risk. Traders say Chinese state refiners also appear reluctant to buy the oil, leaving some crude oil shipments exported from the eastern port of Kozmino unsold.
“Everyone faces a lot of uncertainty,” says Tatiana Mitrova, a research fellow at Columbia University’s Center on Global Energy Policy. “For the shippers and insurance companies it is not yet entirely clear how strictly this mechanism will be applied, so they prefer to hedge and not deal with Russia at all.”
On the other hand, India has stepped in to buy much of the Urals crude, which the EU and Britain banned earlier this month. Some analysts warn against reading too much into the month’s drop in exports, citing factors such as maintenance work at a major Baltic port and bad weather that has delayed some deliveries.
An oil refinery in Mumbai. India has stepped in to buy much of Russia’s Ural crude, which the EU and Britain banned earlier this month.
Photo: Dhiraj Singh/Bloomberg News
Some shipments of Russian crude have traveled by western services in line with the US-led cap, according to people familiar with the shipments, as the Urals price is well below the $60 cap. US officials pushed for setting the cap at high levels to motivate Russia to keep exporting its crude.
Ms Mitrova said she thinks the sanctions could see Russian production fall by as much as 1 million barrels a day next year. US officials have acknowledged that their plan could still cause Russian production to fall, but have designed their policy to try to avoid it.
Shrinking energy revenues are a pressure point for the Kremlin, which earlier this year used a windfall in oil and gas sales to boost the economy and fund its war in Ukraine.
On Friday, Mr Novak warned that Russia might not stop at a 5% to 7% cut.
“We believe that in the current situation, it is even possible to take risks of lower production instead of being guided by sales policy in relation to price caps,” he said. “Today it’s $60, tomorrow it can be anything, and it’s unacceptable for us to become dependent on some decisions made by unfriendly countries.”
The $60 price cap fell between two key benchmarks for the Russian economy. They’re above Russia’s estimated cost of production of around $40 a barrel, analysts say, allowing Moscow to still make profits on most of its oil exports. But the ceiling is below Russia’s fiscal break-even price of above $70 a barrel, the price analysts say is intended to balance its budget.
Russian crude prices slid ahead of and since the December 5 sanctions took effect, partly reflecting the high cost of chartering vessels to transport the oil. According to Argus Media, which tracks commodity prices, Russia’s main Ural crude was sold for $42.40 a barrel from the Baltic port of Primorsk late Thursday. That’s more than $35 a barrel below Brent’s price. Before the invasion, Ural was about $1.50 a barrel less than Brent.
Western price caps follow a string of Russian battlefield losses in recent months as Moscow’s military quickly burns through its reserves of missiles and ammunition. Ukraine’s military on Friday said it was inflicting heavy casualties on Russian forces in the south of the country as it continued efforts to retake Moscow-held territory.
US officials said sanctions against Russia over its war in Ukraine are putting pressure on the country’s economy and that it has managed to disrupt its defense industry.
But on Thursday, Mr Putin dismissed the notion that Russia’s economy was under pressure, saying the country’s markets and economy were stable.
The Kremlin leader forecast that inflation will be just over 12% this year and that although Russia’s gross domestic product has fallen by one measure, unemployment is less than 4%, lower than before the coronavirus pandemic, he said he.
Senior Russian officials have said the cap will not affect Russia’s ability to sustain its military operation in Ukraine.
Write to Evan Gershkovich at [email protected], Joe Wallace at [email protected], and Andrew Duehren at [email protected]
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