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Prof. ST Hsieh

Director, US-China Energy Industry Forum

626-376-7460

[email protected]

February 10, 2023

Global crude oil fluctuations are expected, normally it is determined by the trend or balance of supply and demand. For example, as China emerges from straight control of COVID-19 virus in the past three years, crude oil price will trend upwards because China’s economic recovery will need more crude oil. But economic recovery is a gradual process, so the pressure of crude oil price moving upwards will be gradual too.

However, today, Russia’s announcement of oil production cut by 500,000 bpd in March, even though expected, caused immediate price spike. Nobody knows the real impact of this production cut on the global oil market, because it will take time. But the “uncertainties” associated with Russia’s production cuts are good enough reason for the market to react. The major risk is a runaway crude oil price will disrupt the global economy recovery.

Russia’s action is a consequence of G7/EU imposed price caps on Russian oil and gas after the war in Ukraine broke out almost one year ago. The severe sanctions imposed by G7/EU on Russia have not worked perfectly, because Russian is mounting a major offense against Ukraine right now. There is no reasonable expectation of the war will end anytime soon. While the brutal war damages so far are limited in Ukraine, the economic impacts of the war are felt around the world. Because G7/EU sanctions on Russia energy apply to non-waring parties and vice versa.

It is a fact that G7/EU price cap as well as Russia’s “volunteer” production reduction both are “an intervention in market relations and an extension of destructive energy policies.” Both movements are against the general principle of free trade and market economy. The long-term damages of war in Ukraine on global energy trade will be significant, even after the war is ended. Several results are obvious:

  1. The market rule changes will be irreversible.
  2. Commodity prices will only get more expensive.
  3. Less energy security.

Oil Prices Set For A Significant Weekly Gain As Russia Announces Production Cut

By Irina Slav – Feb 10, 2023, 3:18 AM CST

  • Oil prices spiked on Friday morning as Russia announced plans to cut its oil production by 500,000 bpd in March.
  • Oil prices had been under pressure in the second half of the week as the Fed signaled it would continue with rate hikes and Chinese demand failed to impress.
  • Oil prices are now on course for a 10% weekly gain, and the return of Chinese demand will only add to bullish sentiment.

Oil prices spiked on Friday morning as Russia announced plans to cut its oil production by 500,000 bpd in March. The plans were a response, according to Deputy Prime Minister Alexander Novak, to western price caps.

Crude oil prices were already set to end the week with an overall gain, although in the second half of the week the price climb began to fizzle out as the Fed signaled it would continue with rate hikes and Chinese demand had failed to impress.

The announcement by Russia means oil prices are now set for a significant gain this week. West Texas Intermediate has climbed nearly 10% since the start of the week even though it had slipped below $78 per barrel in early Asian trade.

On Thursday, both benchmarks closed with a decline as concern that oil infrastructure in Turkey may have been damaged by the devastating earthquakes was alleviated by the lack of any evidence of damage.

Crude oil inventory reports from the United States also served to pressure crude oil prices lower this week. According to the Energy Information Administration, inventories of crude in the country rose for the fourth week in a row and are now above the five-year seasonal average.

Expectations of stronger Chinese demand for crude continue to support oil prices: “We expect Chinese oil consumption to increase by around 1.0 million barrels a day this year, with strong growth emerging as early as late in Q1,” analysts from ANZ Bank said, as quoted by Reuters on Thursday.

“Overall, this should push global demand up by 2.1 million barrels a day in 2023,” they added.

“The market is seeing a recovery in demand, with mobility in China, the US and Europe all showing improvement,” Gui Chenxi, a CITIC Futures analyst, told Bloomberg.

By Irina Slav for Oilprice.com

Russia announces cut to oil output over Western price caps

DAVID McHUGH and VLADIMIR ISACHENKOV

Fri, February 10, 2023 at 2:09 AM PST

MOSCOW (AP) — Russia announced Friday that will cut oil production by 500,000 barrels per day next month after Western countries capped the price of its crude over its action in Ukraine.

“As of today, we fully sell all our crude output, but as we stated before, we will not sell oil to those who directly or indirectly adhere to the ‘price ceiling,’” Deputy Prime Minister Alexander Novak said in remarks carried by Russian news agencies.

“In connection with that, Russia will voluntarily cut production by 500,000 barrels a day. It will help restore market-style relations,” he said.

International benchmark Brent crude traded 1.5% higher Friday at $85.75 per barrel.

The Group of Seven major democracies have imposed a $60-per-barrel price cap on Russian oil shipped to non-Western countries. The goal is to keep oil flowing to the world to prevent price spikes that were seen last year, while limiting Russia’s financial gains that can be used to pay for its campaign against Ukraine.

The cap is enforced by barring Western companies that largely control shipping and insurance services from moving oil priced above the limit.

Russia has said it will not sell oil to countries observing the cap, a moot point because Russian oil has been trading below the price ceiling recently. However, the cap, an accompanying European Union embargo on most Russian oil and lower demand for crude have meant that customers in India, Turkey and China have been able to push for substantial discounts on Russian oil.

The impact of a cut of 500,000 barrels per day is an open question as a slowing global economy reduces the thirst for oil.

The OPEC+ alliance of oil producers, which includes Russia, tried to boost oil prices with an October announcement that it would cut production by 2 million barrels per day, only to see prices fall below $80 per barrel by December.

The new reduction could be “an early sign that Russia might try to weaponize oil supplies after last year’s failed attempt to weaponize natural gas,” said Simone Tagliapietra, an energy policy expert at the Bruegel think tank in Brussels.

But that could be difficult to accomplish because it’s easier to find alternative supplies of oil, traded through tankers that crisscross the globe, than to replace natural gas, which before the war mostly came to Europe by pipeline.

Europe did suffer from resulting high natural gas prices but has managed to replace much of the lost Russian supply from other sources including shipborne liquefied gas from the U.S. and Qatar. Natural gas prices have since come down from all-time highs last summer but are still three times higher than before Russia massed troops on the Ukraine border.

Russia Retaliates for Sanctions By Announcing Oil Output Cut

Bloomberg News

Fri, February 10, 2023 at 4:54 AM PST

(Bloomberg) — Russia plans to cut its oil output by 500,000 barrels a day next month, following through on a threat to retaliate against western energy sanctions and sending oil prices sharply higher.

The move threatens to renew turmoil in the oil market, which had so far taken disruption to Russian supplies in stride. It further tightens supply constraints from OPEC+, which Saudi Arabia had already led into a 2 million barrel-a-day production cut last year in an effort to buoy prices. Delegates from the group signaled they won’t take any action to fill in the gap created by Russia.

Crude prices jumped on the news, with global benchmark Brent trading 2.2% higher at $86.34 a barrel by 12:22 p.m. in London. Prior to this week, the international benchmark had dropped 9% since mid-January, helping to ease inflationary concerns.

Russia’s reduction is equivalent to about 5% of its January output. The Kremlin has repeatedly hinted at such a move since the European Union and the Group of Seven industrialized countries began discussing capping the price of Russian crude and refined product exports amid the war in Ukraine.

“Russia believes that the mechanism of price caps on Russian oil and petroleum products is an intervention in market relations and an extension of destructive energy policies of the collective West,” Deputy Prime Minister Alexander Novak said in a statement on Friday. His press service confirmed that crude output will be affected by the cuts.

Since the imposition of EU import bans and the price cap “most observers expected some output loss, and Moscow may just be attempting to portray a compulsory cut as a voluntary policy choice,” said Bob McNally, president of Rapidan Energy Group and a former White House official. “I doubt Russia’s OPEC+ partners were taken by surprise and do not expect the supply reduction will alter their ‘stay put’ policy stance.”

In the short term there is nobody to fill the supply gap created by the Russian cuts, said Giovanni Staunovo, an analyst at UBS Group AG.

As of now, Russia is able to sell its oil volumes to foreign markets, but it does not want to adhere to the price restrictions imposed by Western nations, according to Novak. “When making further decisions, we will act based on how the market situation is developing,” he said.

Market Outlook

The Russian cuts are unlikely to affect global oil prices in the longer term, according to Viktor Katona, crude analyst at Kpler. The reduction so far has only been announced for March and Russia’s output could rebound after that, he said.

Given the nation’s ability to export crude amid sanctions, the production cuts may lead to lower refinery runs while supplies to foreign clients could remain robust, Katona added.

It also might take longer than a month for Russia to redistribute the crude oil and product volumes that have been freed up as a result of Europe’s import bans, said Sergey Vakulenko, a veteran Russia oil expert with the Carnegie Endowment for International Peace.

“Then Russia might continue the production cut and accompanying PR campaign,” he said.

Falling Revenues

Russian oil production has been surprisingly resilient, amid several waves of energy restrictions imposed by western nations and their allies.

Since hitting a post-invasion low of 10.05 million barrels a day in April, Russian oil output rebounded to around 10.9 million at the end of 2022. It stayed close to that level in January, despite the European Union’s ban on most seaborne imports of the country’s crude on Dec. 5.

Still, Moscow’s oil revenue has taken a hit in recent months amid the price caps and generally lower global crude prices. The discount at which Urals crude — Russia’s main export grade — trades to the international benchmark has also widened, as the country seeks out new markets and alternative methods of shipment in the face of sanctions.

Oil prices surge as Russia says it will slash crude production by 5% next month

Jennifer Sor

Fri, February 10, 2023 at 6:26 AM PST

OPEC+ Has No Plans To React To Russia’s Surprise Production Cut

Editor OilPrice.com

Fri, February 10, 2023 at 4:01 AM PST

The OPEC+ group currently doesn’t plan to change the course in its oil production targets after Russia announced a cut in its output for March, two delegates from the OPEC+ alliance told Reuters on Friday.

Oil Surges to Best Week Since October on Russian Supply Cuts

Julia Fanzeres and Immanual John Milton

Fri, February 10, 2023 at 12:54 PM PST

(Bloomberg) — Oil posted its largest weekly gain in four months after Russia followed through on a threat to cut production in response to western energy sanctions.

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