Russia’s deputy prime minister, Alexander Novak, announced that the country plans to cut its oil production by 500,000 barrels per day (bpd) in March. The deputy prime minister said the aim of the cut is to improve the market situation, reiterating the country will not comply with any Western price cap.

Crude prices reacted positively to the news, considering that so far Russian oil production has been relatively resilient. The move—likely in response to the European embargo on Russian crude and refined product imports—aims to improve oil revenues by narrowing the discount of Russian oil to Brent. An added potential benefit for Russia is an associated boost to the Brent price.

We believe the decision is not completely a voluntary one—despite the official claiming otherwise—as market factors likely forced the Russian side to make this decision. We have highlighted in our previous reports that the European embargo on Russian refined products, which came into force on 5 February, will weigh on Russian oil production, as the country will struggle to find enough buyers to compensate for missing European demand. On the product side, the lack of adequate smaller tankers may make it more challenging for Russia to divert refined products to other markets.

Meanwhile, China’s reopening is lifting the country’s oil demand. We expect greater domestic demand to result in higher crude imports over the coming months, tightening market balances further.
Source: UBS