Russian Exporters Weigh Impact of Oil Output Cut

Russia’s decision to cut oil production in March by 500,000 barrels per day will likely have a limited impact on the country’s crude exports as long as oil companies continue to successfully market their discounted barrels. Instead, it is the country’s refining sector, already hit by the Feb. 5 oil products embargo and price cap, that is expected to bear the brunt of the reduction.

Russia’s crude oil exports to non-FSU markets rose to highs of almost 4.9 million b/d in January with shipments from the key export terminals — Primorsk and Ust-Luga on the Baltic Sea, Novorossiysk on the Black Sea and Kozmino on the Pacific Coast — rising to nearly 3 million b/d. Shipping data show that those shipments stood at relatively high levels of nearly 2.7 million b/d in the first 14 days of February. Although those figures are down from January levels so far, they are still up by nearly 500,000 b/d from December 2022, the first month of the EU and G7 embargo and price caps on Russian crude.

Most experts expect that Russian crude exports will remain rather flat in the coming month largely because oil firms managed successfully enough to reroute their barrels from Western markets. Shipping data show that most of the crude shipped from Russian Baltic Sea ports until mid-February was heading to India and, to a lesser extent, China, while Black Sea shipments were destined for India, Turkey and Bulgaria, the latter having received an exemption from the EU embargo. In the east, shipments from Kozmino saw the largest month-on-month decline so far despite a steady recovery of Chinese crude demand.

Friendly Flows

Russian flows to India, China and Turkey — the largest offtakers of Russian barrels these days — are expected to stay high, driven both by attractive prices and strategic cooperation between Russia and those countries. Russian Deputy Prime Minister Alexander Novak was quoted as saying that this year some 80% of crude would be supplied to so-called friendly countries that declined to support the price cap and embargoes.

Indian Oil Minister Hardeep Singh Puri confirmed recently that India would continue to buy crude oil from Russia as long as it could get favorable prices. Industry experts admit that the real discounts for Russian barrels are not as high as reports of $30-$40/bbl because price assessments used for Russian crude are not relevant any more. Russia believes that the price for its crude should be formed in the regions where it is sold. Platts started from Jan. 18 providing assessments for Urals crude delivered to India's west coast.

China is also expected to take more Russian crude this year. Chinese imports of Russian crude rose by 133,000 b/d from 2021 to 1.73 million b/d in 2022, as refiners doubled down on deeply discounted Russian barrels after Moscow's invasion of Ukraine. This year, shipments might exceed 2 million b/d as analysts expect rising demand in China. Russia also expanded its infrastructure facilities to allow for higher shipments to the Asia-Pacific region. However, much will depend on the availability of ships and on any further tightening of Western sanctions.

Russia continues to look at other markets. By end-March, Russia should agree on the main terms for crude supplies to Pakistan. Islamabad earlier said Russia could supply roughly 35% of the country's total imports of around 190,000 b/d — or some 67,000 b/d. Price will be an issue, though.

The Russian government recently proposed tax amendments that are likely to force oil firms to seek lower discounts for their barrels, but since the market for Russian crude became rather murky, it is not clear whether those tax changes will have any effect on negotiations between Russian exporters and their customers.

Refiners Bear Brunt

While the planned production cuts will likely only modestly impact exports, they might have a more significant effect on Russian refining runs. Deliveries of crude to Russian refineries were already forecast to decrease in March and April because of planned maintenance.

Even before the planned production cut announcement, sanctions on sales of refined products were expected to cause greater problems for Russia. The marketing of oil products is inherently more challenging, given the complexities of fragmented markets, different regional specifications and shipping constraints.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact