Russia is responding to Western sanctions by cutting oil production.
The country said it plans to cut oil production by 5%, or 500,000 barrels per day, according to the Wall Street Journal.
Following Russia’s invasion of Ukraine, Russia limited and then paused its natural gas exports to Europe after sanctions were placed on Moscow. The country has been using its array of commodities to put a wrinkle in Western countries’ sanction efforts.
The decision was Russia’s first indication that it would limit its oil output to fight against sanctions.
The European Union and the Group of Seven (G7), an intergovernmental organization that includes the world’s most developed economies, have worked to reduce Russia’s oil revenue to limit its military capacity. The EU issued a ban on most imports of crude oil and also set a $60 per barrel price cap for Russian crude, the Wall Street Journal said.
The EU eventually stepped up its measures, imposing a ban on refined Russian products, and a G7 price cap went into effect on Sunday.
Moscow says it won’t respect the price cap and, until now, has kept its oil output stable, according to the Wall Street Journal. In December, President Vladimir Putin banned the sale of Russian oil to countries that capped their sales price.
Russian Deputy Prime Minister Alexander Novak said his country plans to cut oil production by 500,000 barrels a day starting in March.
“Today, we are fully selling the entire volume of oil produced, however, as previously stated, we will not sell oil to those who directly or indirectly adhere to the principles of the ‘price ceiling,” Novak said, according to Russian state newswire TASS.
“In this regard, Russia will voluntarily reduce production by 500,000 barrels a day in March. This will help restore market relations.”
At a press briefing in September, when asked if the price cap would enable other countries to buy Russian oil at a discount, National Security advisor Jake Sullivan said, “We’re continuing down the road of negotiating alongside our G7 partners and working with countries who are purchasers or prospective purchasers of Russian oil — what the parameters in terms of a price cap would look like.”
The oil reduction is expected to increase oil prices worldwide.
Until now, Russia has curtailed the impact of sanctions by exporting to China and Asia, the Wall Street Journal said.
Last month, the country produced 10.9 million barrels per day, just 100,000 fewer barrels than in February 2022 before it invaded its neighbor Ukraine, according to Viktor Katona, a crude analyst at Kpler.
Katona says Russia’s announced product cut signifies that it could face challenges selling its oil and refined products.
“Considering that Russia was running on max capacity all the way up until now, this is finally, the effect of sanctions kicking in and bringing Russian production to a new optimal level,” said Katona.
“Russian refining needs to adapt to there being no European staple demand.”
The analyst also noted that Russia is bounded by small storage space, meaning it has limited options to store an overproduction of oil.
Richard Welch, an oil and gas industry expert, says the Biden administration’s sanctions on oil were a misguided decision and that the U.S. must step up to the plate to combat the impact of a shortened supply.
“By punishing Russia for invading Ukraine, the Biden administration caused a massive supply shortage of petroleum. Furthering the supply shortage, this administration has terminated vital US pipelines, federal lease sales, and offshore drilling,” Welch told The Dallas Express.
“In Texas alone, there are hundreds of pipeline permits that haven’t been approved for over 18 months. If Russian oil is to continue being sanctioned, US production must increase on a massive scale. Prices will continue to climb well beyond 2022 numbers unless this administration unleashes our domestic production capability.”
Brent crude futures, the international benchmark for oil, are currently trading at $28 per barrel higher than Russian Urals on Friday, CNN says.