Russian Oil Output May Dip Further on Sanctions. But For How Long?
In January this year, the outgoing Biden administration slapped its last round of sanctions on Russia. They targeted specifically the shipping industry and the oil industry—and helped oil prices start the year with a gain. Now, these sanctions could cause a marked dip in Russian oil production. Yet it is unclear how long the dip would last.
Reuters reported this week that it had talked to energy industry executives and traders who said Russia has no choice but to start crimping oil production because it doesn’t have enough sanction-free tankers to carry its crude abroad after the latest sanctions. Also, Ukrainian drone attacks on refineries are making an increase in local processing more difficult, essentially leaving Russia’s energy majors no choice but to cut output.
The report noted that loadings of Russian crude from key ports were down by 17% in January from a year earlier and that, according to industry insiders, production may need to be reduced to below 9 million barrels daily. However, it’s not as simple as that.
The International Energy Agency reported this week its latest forecast for oil supply and demand, noting in it that the latest sanctions will prove no more than a temporary hindrance for Russian oil exports. In fact, the agency said Russian oil exporters were already finding new ways to circumvent U.S. and EU sanctions and continue shipping oil abroad. Not only this, but the IEA also estimated Russia’s oil production for January higher by 100,000 bpd for a total of 9.2 million barrels daily. The IEA has had to revise its Russian oil production estimates on numerous occasions.
Other sources, however, say that oil production in January actually fell below 9 million barrels daily to 8.96 million barrels daily. What’s more, refining rates increased despite the Ukrainian drone attacks on oil-processing facilities. In other words, the information reported by Reuters may be inaccurate, especially in the context of reports that Indian oil importers are currently hard at work crafting ways to continue receiving Russian crude without running afoul of U.S. sanctions, confirming the information reported by the International Energy Agency and disputing the Reuters report.
The more important bit, however, is that Russia’s revenues from the exports of crude oil and fuels also went up in January, again according to the International Energy Agency, which may not be the most reliable source of forecast information but on hard data from the recent past it tends to be more credible.
The higher prices caused by the Biden admin’s sanctions pushed Russia’s oil and fuels revenues higher by $900 million, the International Energy Agency calculated, for a total of $15.8 billion, in yet more evidence that sanctions critics may very well have a point in saying that the punitive measures often have unintended and the opposite of the intended results.
It is in this context that President Trump dropped his latest bombshell in the form of an hour-long call with President Putin regarding the peace prospects for Ukraine. The U.S. president said the conversation had been productive and that following it, he had tasked senior White House officials to prepare for negotiations on a peace deal. Once such a deal is signed, the United States federal government may lift sanctions on Russia’s energy sector, which would be in tune with Trump’s campaign promise for lower energy prices.
Of course, a peace deal is not a certainty, although there does seem to be a marked willingness on both sides to put an end to the fighting. Yet the implications of such a development for Russia’s energy industry—specifically, oil production—are less clear. Russia is bound by its OPEC+ commitment to keep a cap on oil production. If the war in Ukraine ends and the U.S. lifts sanctions, the war premium on international oil prices will vanish, forcing OPEC+ to keep production lower for longer in order to avoid a sharp drop in prices.
Demand for crude oil, meanwhile, may be working in OPEC+’s favor, with the International Energy Agency predicting a growth rate of 1.1 million barrels daily for this year, which was a 50,000-bpd upward revision of earlier forecasts. That would be welcome news to large producers such as Russia, especially if they are freshly emerging from sanctions that may have boosted revenues but have also boosted expenses related to getting these revenues.
According to one Reuters source from the Russian oil industry, “Everyone is waiting for this war to be over.” It may well be over before spring—and oil prices will tank, at least temporarily. And President Trump will have fulfilled one more campaign promise—to the chagrin of the U.S. oil industry, to be honest, but that shouldn’t last too long once lower prices start driving global oil demand growth higher.
