Russia says crude output cut aimed at reducing price discount, ensuring stable supply

Russian Deputy Prime Minister Alexander Novak said March 23 that Russia's recent decision to cut crude output by 500,000 b/d from March until the end of June is aimed at reducing the discount on Russian crude and stabilizing deliveries.

Russia has described the latest cut as "voluntary". It is being carried out independently from its involvement in the OPEC+ crude production agreement.

The cut follows the introduction of price caps and EU import bans on most Russian crude and oil products as part of Western sanctions imposed in response to Russia's invasion of Ukraine.

"We believe that this decision is the right one. It is aimed at reducing the discount and ensuring stable supply of our resources to world markets, taking into account current market conditions, and given our rejection of EU and G7 decisions to introduce a price ceiling on Russian oil and oil products," Novak said during an interview broadcast on the Russia 24 TV station.

Russia's key crude grade Urals has been trading at significant discounts to Dated Brent since Russia invaded Ukraine.

Platts assessed Urals FOB Primorsk at $39.34/b on March 22, a $36.2/b discount to Dated Brent. Platts is part of S&P Global Commodity Insights.

Novak said the discount on Urals will shrink as the situation stabilizes and new logistics chains are developed.

"The discount has somewhat decreased. Compared to mid-January, it has already decreased by $8/b on average," Novak said.

Platts assessed the discount in mid-January at around $40/b.

Before the conflict in Ukraine began Urals was trading at a discount of below $10/b to Dated Brent.

Novak said that the decline in global oil prices in March was due to the banking crisis in Western countries, but they should recover to previous levels soon.

Output plans

The 500,000 b/d cut was initially announced for March alone. Novak said March 21 that Russia has almost reached this level, and that the cut will continue until the end of June.

"We will also look at the situation in the future, and how we will ensure the industry's stable operations in terms of supplies to foreign markets," Novak said March 23.

Until March, Russian production had held steady since the EU import bans and G7 price caps were introduced on most Russian crude from Dec. 5, and most Russian oil products from Feb. 5.

Russian crude output was up 10,000 b/d on month to 9.86 million b/d in February, according to the latest Platts survey by S&P Global Commodity Insights.

Output remains below February 2022 levels of 10.11 million b/d but is significantly above its war-time low of 9.14 million b/d in April 2022.

Novak said that Russia has no problems contracting seaborne oil exports for April, and Russian refining is stable.

Russian production may be further affected by any escalation in the conflict in Ukraine. An increase in active fighting could result in further sanctions, or damage to infrastructure.

Negotiations within OPEC+ could also impact Russia's production policy. The joint monitoring committee overseeing the deal is next due to meet April 3, followed by a full ministerial meeting on June 4.

Novak said that Russia has not received any new proposals from OPEC+ partners on market measures. The group is currently operating under an agreement to cut production by 2 million b/d from November 2022 until the end of 2023.

"Everyone is focused on fulfilling the previous agreement that our cut will be in force until the end of the year," Novak said.