Russia Reduces Oil Production in Response to Western Sanctions – How Global Oil Markets Are Cushioning Moscow’s Revenues
Russia recently announced it would be reducing oil production by 500,000 barrels per day starting in March, a move that is seen as a direct response to Western sanctions imposed on the country. The European Union (EU) ban on importing Russian seaborne crude oil and their price caps designed to limit Moscow’s revenues are the main factors behind the decision.
A report from researchers at Columbia University, the Institute of International Finance, University of California, Los Angeles, and IE University, found that Russia was able to redirect crude oil exports from Europe to alternative markets such as India, China, and Turkey. However, the report also noted that export earnings were still “curbed substantially” by the discounts that Russian oil exporters “had to accept in market segments where the impeding EU embargo lowered demand.”
The EU and G7 nations implemented an international price cap of $60 per barrel of Russian crude, enforced by prohibiting the involvement of any insurers or operators from the G7 or the EU, which is where most of respective companies are located. However, according to the Center for Energy Economics (CREA), a price cap closer to Russia's production price of around $30 would make more sense and would lead to about the same reduction in Russian revenues as the entire EU ending remaining fossil fuel dependency on Russia.
At the same time, Russian oil producers are also dealing with a shortage of storage space for their output as tankers are now having to spend more time at sea making deliveries to farther destinations in Asia, as they struggle to find new buyers. Russia is interested in a large rise in oil prices in this regard, which would boost Moscow's revenues by making up for reduced exports, as well as cause problems for Western countries already dealing with inflation.
Goldman Sachs says that Russian oil importers pay more to offset western sanctions, cushioning Russia from the impact of Western sanctions. The gap between the average effective price paid and the quoted crude price has been widening since March last year, reaching around $25 per barrel in December. This resilience of Russian oil production may be partly attributed to the higher effective prices paid for the commodity.
Many observers expected the sanctions against Russia to substantially raise the price of oil. However, tanker traffic data suggests that global oil markets have been more resilient than anticipated.
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