The consequences of the decision to voluntarily reduce Russia’s oil production are named

Expert Yushkov: “Domestic producers are losing their market share and making less profit”

In the second quarter of 2024, Russia will additionally, voluntarily, reduce crude oil production and exports by a total of 471 thousand barrels per day. This is stated in a government press release on behalf of Deputy Prime Minister Alexander Novak. The question arises: why did our country, already under energy sanctions, need this? After all, world oil prices remain at an acceptable level – above $80 per barrel, and domestic producers are losing profits from export sales due to new voluntary “cuts”.

Almost a year ago, in April 2023, Russia pledged to voluntarily reduce production by 500 thousand bpd by the end of 2024. Accordingly, its current step complements the previous one. According to Novak, in April the country will reduce production volumes by 350 thousand bpd, and exports by 121 thousand. In May, the structure will change – minus 400 thousand (production) and 71 thousand (export). And in June, Russia will only reduce production – by 471 thousand bpd. “Subsequently, in order to maintain market stability, these additional reductions will be gradually restored depending on market conditions,” the Deputy Prime Minister explained.

The official Russian quota for annual oil production within OPEC+ is 9.95 million bpd. Taking into account both decisions (last year and this one) on voluntary reduction, the production level in April-June will fluctuate around 9 million bpd.

Why is this being done? On this score, there is only an extremely vague official wording from Novak: for the sake of “strengthening precautionary measures taken by OPEC+ countries in order to maintain the stability and balance of oil markets.” Earlier, the Deputy Prime Minister said that market conditions were affected by tensions in the Red Sea (which, we recall, was provoked by attacks by the Yemeni Houthis on several ships). Meanwhile, as it turned out in early February, the OPEC+ monitoring committee decided not to revise the current oil production quotas and not to make any adjustments to the general policy of the alliance.

“This whole story is quite strange,” says Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation. – Russia’s cumulative reduction in annual production to 9 million bpd is already serious. But the following motives are visible. We see that a number of market players outside of OPEC+ have announced an increase in production volumes. For example, Guyana is 200 thousand b/d, Brazil is 300-400 thousand. It is clear that the participants in the OPEC+ deal need to somehow respond to these actions on the part of their competitors. And here it is not Russia that looks organically in the role of the skirmisher, but rather Saudi Arabia, which sets its budget based on a price of $85 per barrel.”

According to Yushkov, Russia is quite happy with the current situation: taking into account the current world price in the region of $80-82 and a discount on Urals of $10, it sells its oil in accordance with the value fixed in the federal budget of $71.3 per barrel. It is also clear that Moscow’s latest decision to voluntarily reduce production and export volumes is not related either to sanctions, or to the breakdown of equipment, or to the tanker fleet, which is sufficient in number to deliver raw materials to the consumer.

“The obvious advantages of this step: world prices will rise to some extent, and the discount on our oil will decrease,” says Yushkov. – In addition, the less we export, the less excitement in the West around the “shadow fleet”, and the lower the cost of transportation. But there are also obvious disadvantages: domestic manufacturers are losing their market share to someone else, and, in addition, they are not making enough profit from sales volumes. This situation benefits the state from a fiscal point of view, since it collects more taxes based on the increased average price (the more expensive each barrel, the better). But companies are interested precisely in production growth.”

Russia made its decision due to the high risk of a supply surplus on the crude oil market, says Nikita Maslennikov, a leading expert at the Center for Political Technologies. According to him, if not for this measure, price quotes would have moved down. The situation cannot be considered unexpected, since it is in the second quarter that this kind of supply surplus occurs regularly. The head of the Central Bank, Elvira Nabiullina, also pointed out this market moment at a press conference on February 16. Actually, the decision is completely justified. Raw materials exports, despite the current decline in their volumes, remain a significant factor, primarily for the formation of basic trends in the trade and balance of payments. Which, in turn, is important for the exchange rate, the instability of which sooner or later is transferred to domestic prices and fuels inflation.

“The measure is fully compatible with the policy of the OPEC+ oil association, which is trying to maintain balance in the market, despite opposition from the United States,” says Alexander Shneiderman, head of the sales and customer support department at Alfa-Forex. – The logic is simple: the lower the production, the more expensive the product can be sold to meet the existing demand. We are not talking about major losses: the cost of a barrel remains close to the “price ceiling” that is set for the Russian Urals grade. The situation, if it does not directly affect the contract amounts, will definitely increase the volatility of currencies. First of all, the ruble exchange rate.”