A recognition of reality, not a show of strength

Clara Ferreira Marques wrote yesterday in Bloomberg Elements:

Russia’s plan to cut oil production by 500,000 barrels a day next month — roughly 5% of its January output and 0.5% of global supply — was a show of strength.

Sorry but no. It was another case of framing the inevitable as voluntary. Before the cut was announced, most market observers had agreed that Russia would have to reduce output by 5% or more following the second EU embargo. I am talking about the IEA, most notably; but also OPEC, the US EIA, S&P Global Platts, Energy Intelligence, OIES, and a number of investment banks.

And, as S&P Global reported on Jan. 11:

Russia estimates that its oil output may fall 5%-7% in 2023 as a result of the sanctions.

Note that the market was not much impressed by Russia’s announcement. Brent only added 2% on the news, which isn’t much given the price volatility typical of the oil market nowadays.

Admittedly, most forecasters were wrong about Russian oil output last year, when it recovered after an initial disruption in the spring and failed to decline in December under the first EU embargo. In a sense, Russia has defied the market’s expectations: it keeps supplying China, India, Turkey and other non-Western countries with discounted crude. That’s probably what the US intended to achieve with the price cap: to keep Russia exporting while reducing its revenue.

Russian oil companies have done a great job rerouting their crude export flows from the EU to Asia. However, the EU product embargo is a greater challenge and there’s a limit to what even the savviest Russian salesmen can do.

Added Feb. 19. This passage is also worth rereading, as it focuses on the volume but makes no mention of the price:

Alexander Isakov of Bloomberg Economics points out that early February production stood at 10.9 million barrels a day, but the budget was built around 9.8 million barrels — leaving space for more pain to be inflicted.

According to Reuters,

…the 2023 federal budget is based on a projected Urals price of just over $70 a barrel…

And it still wouldn’t balance: that would require an oil price above $100 a barrel, according to Reuters’s sources.

Russia is producing 10.9 mmbpd and Urals is in the low $50s. If it produced 9.8 mmbpd and Urals remained at or below $60 a barrel, it definitely wouldn’t be meeting its budgetary targets. The pain would be mostly self-inflicted.

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