Russia Cuts Oil Production in Response to Western Sanctions and Price Caps

On February 10th, Russia announced that it would be cutting its oil production by 500,000 barrels per day in response to Western sanctions and price caps on its oil and petroleum products.^[0] This reduction amounts to approximately 5% of Russia's total oil output and 0.5% of the global oil supply.^[1] As the United States, European Union, and Australia have all implemented price caps on Russian oil and petroleum products, the Kremlin has been restricted in its ability to finance its war machine.^[2]

The G7 countries imposed a $60 price cap on crude oil originating in Russia, while the EU and Australia implemented two new price caps on seaborne petroleum products from Russia, at $45 and $100 per barrel, respectively. The US, EU, and UK then updated their policies to account for the new price caps. Deputy Prime Minister Alexander Novak said that the March production cuts would ensure a “recovery in market relations.”^[3]

Oil prices responded to the news by rising, with Brent crude trading 2.2% higher at $86.34 a barrel and US crude futures jumping around 3%.^[3] In January, the Russian finance ministry reported that the average price of Russia's benchmark Urals grade oil was $49.48, forty percent lower than the average for Brent crude which was $84.^[4]

In addition to the price caps, the EU also banned its own imports of Russian oil and, subsequently, refined petroleum products.^[5] These measures were supplemented by price caps on the global trade of Russian oil, enforced by G7, EU and Australian shipping and insurance firms refusing to facilitate sales above the cap levels. Bob McNally, president of Rapidan Energy Group and a former White House official, commented that “most observers expected some output loss” and that “Moscow may just be attempting to portray a compulsory cut as a voluntary policy choice.” As such, the OPEC+ alliance, of which Saudi Arabia leads with Russia’s assistance, is not expected to be affected by the production cut.^[3]

0. “USOIL Consolidates After Russian Production Cut & US SPR Sale Announcements” FXCM, 14 Feb. 2023, https://www.fxcm.com/markets/insights/usoil-consolidates-after-russian-production-cut-us-spr-sale-announcements

1. “Why Oil and Natural Gas Stocks Surged Today” The Motley Fool, 10 Feb. 2023, https://www.fool.com/investing/2023/02/10/why-oil-and-natural-gas-stocks-surged-today/

2. “Russia seeks to once again weaponize oil – White House” Ukrinform, 11 Feb. 2023, https://www.ukrinform.net/rubric-economy/3668676-russia-seeks-to-once-again-weaponize-oil-white-house.html

3. “Russia plans to cut March oil output by 500,000bpd, Novak says” Energy Voice, 10 Feb. 2023, https://www.energyvoice.com/oilandgas/482065/russia-plans-to-cut-march-oil-output-by-500000bpd-novak-says

4. “Markets shrug off Russia's threat to curb oil production” Axios, 13 Feb. 2023, https://www.axios.com/2023/02/13/russias-energy-weapon-looks-increasingly-puny

5. “How the oil price cap balances pain for Russia with protecting U.S. consumers” Federal Reserve Bank of Minneapolis, 10 Feb. 2023, https://www.minneapolisfed.org/article/2023/how-the-oil-price-cap-balances-pain-for-russia-with-protecting-us-consumers