Russia will cut oil production from next month in response to a price cap imposed by western nations, the country’s top energy official has said, in the first sign Moscow is seeking to weaponise oil supplies after slashing natural gas exports to Europe last year.
The cut of 500,000 barrels a day, the equivalent of almost 5 per cent of Russia’s production, or 0.5 per cent of world supply, was a response to the “destructive energy policy of the countries of the collective west”, Alexander Novak said on Friday.
Christyan Malek, global head of energy strategy at JPMorgan, said Moscow’s move would “be viewed in some quarters as Russia starting to weaponise oil”.
But he added that a more practical reason could be to prevent the market from being “too oversupplied” as Russia reroutes exports from Europe to Asia.
Novak’s announcement came as tensions between Moscow and the west mount two weeks before the first anniversary of Vladimir Putin’s full-scale invasion of Ukraine.
Russia launched a large aerial attack on Ukraine on Friday, with one missile crossing over into Moldovan airspace amid heightening expectations of a new Kremlin offensive.
Natalia Gavrilita, Moldova’s prime minister, resigned a day after the country’s intelligence agency said Russia’s security services were seeking to undermine the former Soviet state.
Until Friday, Russia had broadly tried to maintain oil exports, which provide more government revenues than gas.
But analysts warned that it may be struggling to sell all of its oil as the west steps up its sanctions.
The price of Brent crude, the international benchmark, jumped 2.3 per cent to $86.43 a barrel immediately after Novak’s announcement, having earlier traded largely flat on the day. Novak, Russia’s deputy prime minister and chief negotiator with the Opec+ group of oil producers, cited international measures imposed on Russia in response to the invasion as the reason for the cut.
The EU extended a ban on seaborne imports of Russian crude to cover refined fuels such as diesel and petrol on February 5, while the G7 simultaneously imposed a price cap on those fuels that will be binding for buyers who access western tanker and insurance markets.
“Russia believes the price cap mechanism for selling Russian oil and oil products interferes with market relations,” Novak said.
“It continues the destructive energy policy of the countries of the collective west.” He added that Russia’s planned oil cut would help “restore market relations”.
But cutting oil production further may risk alienating big oil importers such as China and India, which are aligned with Russia but sensitive to oil price increases.
The G7 price cap is partly designed to keep Russian oil in the market to avoid the economic damage of disrupting exports from one of the world’s largest oil exporters, but at a lower price to hit Moscow’s budget.
In January, Russia’s government revenues from oil and gas were down by 46 per cent year on year, contributing to a fast-growing budget deficit that reached $25bn for the month as the Kremlin boosts defence spending.
Pierre Andurand, one of the world’s top-performing traders in the sector, has claimed that Putin has already “lost the energy war”.
Oil prices surged to $139 a barrel shortly after the start of the invasion but have fallen back in recent months.
While the Kremlin’s reduction of natural gas exports to Europe triggered an energy crisis and record fuel prices last year, gas prices have also tumbled since. Russia has warned it will not deal with buyers that formally use the oil price cap.
But Urals, its main export crude, has fallen to a large discount below the cap level of $60 a barrel as the country tries to find new buyers in Asia. “Given Russia’s crude has fallen to steep discounts in international markets, it makes sense from Moscow’s point of view to try to maximise revenues by cutting production to tighten the market and boost the price,” said Amrita Sen at Energy Aspects, a consultancy.
Opec, which has partnered with Russia since 2016 to manage oil production, had no immediate response to Moscow’s announcement.
One Gulf Opec delegate said the cartel, which angered Washington when it agreed last October to reduce global supply, was unlikely to adjust production to offset a Russian cut.
Dmitry Peskov, Putin’s spokesman, told reporters that Russia had discussed its decision to cut production with “several” Opec+ members before announcing the move.
Three people with knowledge of discussions said Saudi Arabia, Opec’s most powerful member, had been informed in advance. There was no immediate response to queries from the Saudi Arabian energy ministry.
Jorge León, senior vice-president at energy analysts Rystad, said the market had already been expecting Russian oil output to decline by between 300,000 and 500,000 b/d in March because of the difficulty of finding new buyers for its refined products.
“This might not be a ‘voluntary’ cut’,” he said, adding that Moscow probably preferred to announce it was reducing production than to suffer a sanctions-enforced decline.