Russia may cut oil production following the decline in its exports

The Russian Federation and Saudi Arabia continue their common policy of voluntarily reducing the oil supply. Thus, the Russian Federation promises to extend the reduction of exports by 300 thousand barrels per day (b / d) that began in September until the end of this year. Saudi Arabia, for its part, also extended production cuts by 1 million b/d until the end of the year. Until now, Russia, reducing oil exports, has sought to do this without compromising production, increasing refining. It is possible that in the fall, against the backdrop of refinery repairs, it will not be possible to continue such a policy, so the Russian authorities allow a decrease in oil production – the decision will be made on a monthly basis.

Deputy Prime Minister Alexander Novak announced the extension of the reduction in oil exports from Russia in the amount of 300,000 bpd until the end of this year. The Russian Federation intended to maintain such a reduction in exports in September, and before that, in July-August, exports were reduced by 500,000 bpd. According to Kpler, offshore oil exports in August amounted to 3.14 million b/d, respectively, until the end of the year, the Russian Federation can keep it at the level of 3.3-3.35 million b/d.

At the same time, Saudi Arabia, Russia’s partner in the OPEC+ deal, announced an extension of the reduction in oil production by 1 million b/d – also until the end of the year. Riyadh has maintained this amount of voluntary cut since July, extending it consistently every month. Following this decision, Brent quotes exceeded $90 per barrel for the first time since November 2022.

Previously, the reduction in Russian exports did not force Russian oil companies to reduce production in the face of high prices for oil and oil products.

However, the vice-premier’s message included a proviso that the Russian authorities now admit such a possibility. Russia is going to consider this issue on a monthly basis, and production may decrease only if sufficient processing capacities are not available.

The Russian Federation, in the face of a significant rise in fuel prices and its shortage, is internally interested in increasing oil refining, but in September-October this opportunity will be limited due to the need for scheduled repairs at refineries. At some refineries, repairs are postponed to a later date, but a number of refineries cannot postpone repairs due to equipment wear and technological necessity. At the same time, the reduction in oil production can only be forced.

The Russian Federation uses an instrument to reduce exports in the context of the oil price ceiling, which was set by the EU and the G7 at $60 per barrel since December last year. The intentional reduction in oil supply from the Russian Federation and Saudi Arabia allowed to increase the quotes of the main Russian oil grade Urals at an accelerated pace in relation to Brent. As a result, the sanctions discount to Brent, according to the Ministry of Finance, is already less than $13 per barrel, while in December 2022 it exceeded $40 per barrel.

Saudi Arabia will extend production cuts, as expected, as returning significant additional volumes to the market, which weakens seasonally in the autumn due to repairs at refineries in the Northern Hemisphere, is not practical, Kpler’s Victor Katona said.

The kingdom’s production will remain at 9 million b/d, while exports will increase in the autumn months. The fact is that Saudi Arabia burns about 700,000 b/d of oil for electricity generation during the summer months, and in the fall, when conditional demand for air conditioning falls, much less oil is burned, the expert concludes. Thus, both from Russia and from Saudi Arabia during September-October, oil exports will be 200-300 thousand b/d higher than in summer, despite the fact that production figures are unlikely to change. According to Mr. Katona, those repairs that can be shifted to the spring of 2024 will be postponed (Alexander Novak also mentioned the revision of the repair schedule) due to the high attractiveness of oil product exports: for example, even on the basis of FOB, Russian diesel is sold for about $105 per barrel , that is, about $20 more expensive than oil. If the repairs cannot be shifted to 2024, as well as to additionally load the capacities of some refineries, then only in this case the oil companies of the Russian Federation will have to cut production, Viktor Katona adds.

Dmitry Kozlov