Russia forced to slash oil output by half a million barrels a day

Russia is planning to reduce its oil production by tens of millions of barrels per day in response to a Western price limit that threatens the Kremlin’s revenues.

Alexander Novak, the deputy prime minister, stated that oil output could be cut by 5pc-7pc daily in response to West’s price caps.

Novak said that cuts could reach between 500,000 and 700,000 barrels per hour. This is a small amount of global supply, but it would add to the pressure on an oil market already tight.

This move could drive oil prices up, increasing living costs across the West.

Moscow could also punish its enemies by raising oil prices, which would allow it to demand more money from buyers like China and India that are buying Russian oil.

Russia’s President Vladimir Putin is expected to issue a decree responding to the West’s policy. This uses financial muscle to impose an oil export price cap of $60 per barrel.

This cap was created to limit the amount of oil the Kremlin can earn, which is used to fund the war against Ukraine. It doesn’t stop Russian oil from flowing due to its importance on the market. Russia accounts for around 10 percent of global production.

Russian oil was traded at a steep discount even before the price caps. The price of the Urals oil blend averaged $57.49 per barrel between November 15th and December 14, $20-$30 less than Brent Crude, and below the price cap.

Nathan Piper, head of oil and gas at Investec said that they were trying to manipulate the market to drive up the price so that they can achieve a higher price even if they have a price gap.

It’s a 100m barrel-per-day market but there are only 2-3 million barrels of spare capacity per day. They are trying to change a market that is already very tight by threatening to reduce half a million barrels.

China and India have increased their Russian oil purchases this year, as Western buyers have abandoned the market. According to Alan Gelder (oil market expert at Wood Mackenzie), India purchased on average less than one million barrels of Russian oil per day between September and November. Prior to the war, purchases were minimal.

According to Mr Gelder, the Russian cuts were less than markets expected. Meanwhile, traders focused on the impact of Covid rules being relaxed on Chinese demand. This will help the economy reopen, but also drive an increase in infections.

Brent crude oil rose 1.7 percent to $82.38 per barrel at 11 am UK time Friday. West Texas Intermediate rose nearly 2pc to $78.98 per barrel.

This means that oil prices now stand at the same level as they were at the beginning of the year. They reached highs of nearly $128 per barrel in March.

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