Oil is equalized according to the market – Newspaper Kommersant No. 48 (7493) of 03/22/2023

The government decided to extend the reduction of average daily oil production by 500,000 barrels from March for another three months. As conceived by the state, the mechanism should restore the balance of supply and demand and support prices against the backdrop of Western pressure. Experts consider the mechanism to be working and expect the situation on the global oil market to stabilize just in time for the expiration of voluntary restrictions in the Russian Federation.

Russia, in March voluntarily reduced oil production by 500 thousand barrels per day from the level of January, will maintain this limit until the end of June 2023, Deputy Prime Minister Alexander Novak said. Such a decision, as he explained earlier, will contribute to the restoration of market relations against the backdrop of the introduction by some countries of the ceiling on prices for Russian oil and oil products. According to the official, the target level of reduction will be reached in the coming days.

Back in February, Russian oilmen actively increased oil and condensate production against the backdrop of a reduction in export duties (in February, by almost 2% compared to January, to about 1.508 million tons per day). The reduction in production, which is unlikely to be covered by other major global suppliers, is designed to increase prices in the world market.

Mr. Novak noted that the West’s deprivation of traditional energy sectors of investment, the imposition of restrictions on the free movement of energy products and the embargo on the supply of oil and petroleum products are “unnatural man-made factors” of pressure on the market. He also believes that this, together with the introduction of a price ceiling, creates significant risks for the energy security of the whole world.

According to Kommersant’s sources in the market, key Russian oil companies consider the decision to extend production cuts acceptable, but, they note, delaying such a containment will have a bad effect on the largest players.

In particular, they will have to stop and conserve wells, which will lead to additional losses. Subsequently, Kommersant’s interlocutors note, it will become more difficult to quickly increase production.

Also, the market fears a reduction in the production of petroleum products, wholesale prices for which were actively growing during the month until mid-March and only recently started to decline. In turn, Alexander Novak assured that the government does not see any risks for the loading of oil refineries against the background of production cuts. “In terms of balance, we have enough for the production of gasoline, diesel fuel,” he said.

Vyacheslav Mishchenko from the Center for Analysis of Strategy and Technologies for the Development of the Fuel and Energy Sector of the Gubkin University considers the government’s decision to extend the terms of production cuts logical, since such a measure would not have any effect in the short term. He notes that Saudi Arabia used a similar mechanism for adjusting the fundamental balance in the oil market before, when it cut production in excess of the OPEC+ quota (the last deal involves a reduction of 2 million barrels per day until the end of the year). According to the expert, global supply still exceeds demand, which is reflected in prices. However, he believes that a jump in consumption could ensure China’s exit from covid restrictions, which will even out the balance just in time for mid-summer.

Mr. Mishchenko agrees that the price ceiling and the policy of restrictions are destroying the pricing mechanisms that have been developing in the oil market for decades, so it is difficult to predict how the market will behave in the future. He suggests that major oil consumers, such as China and India, may eventually abandon benchmark price quotes and create new trading platforms and benchmarks, including in cooperation with Russia. The expert does not expect a pronounced negative effect from the reduction in production on the financial performance of Russian oil producers or the prospects for their further production.

Olga Mordyushenko