- Russia over-delivered on its promise to cut March production by 500,000 bpd, cutting it by 700,000 bpd instead.
- Despite the production cut, Russia’s crude oil and petroleum products exports rose to their highest levels since April 2020
- Traders should keep a close eye on Russia’s production in May and June, as the country may increase production if there is strong demand for both products
Russia made headlines and moved markets when it announced in February that it would cut March oil production by 500,000 bpd from its February production level of 10.2 million bpd.
According to Bloomberg, Russia actually over-delivered on its promise and cut March production by 700,000 bpd. At the same time, according to the IEA, Russia’s March crude oil and petroleum products exports rose to their highest levels since April 2020 (a 600,000 bpd increase).
Russia has also committed to extending its 500,000 bpd production cut through the end of 2023 as part of the recent OPEC+ voluntary production cut agreement.
The important issue for the oil market is not what Russia says it is going to do but what Russia actually does. If Russia is producing and exporting more oil than it says it is, then not only is oil priced higher than it should be given the actual supply, but traders should be skeptical of Russia’s public announcements regarding oil production in the future.
Considering India, China, and Turkey’s appetite for Russia’s cheaper crude oil, it is reasonable to question Russia’s commitment to such a major production cut.
According to TankerTrackers.com, Russia’s crude oil exports increased significantly between February and March. In February, Russia exported 3.69 million bpd. That number jumped to 4.31 million bpd in March. Exports are not the same as production, and it is entirely possible that Russia cut production between 500,000 and 700,000 bpd while also increasing exports.
It may have exported oil held in storage, left over from the period when Europe stopped buying Russian oil, but India and China had not yet increased their imports. Or, Russia may have more crude oil available to export now that Russian refinery runs have declined as a result of Europe’s ban on importing Russian petroleum products.
According to Reuters, Russia intends to cut refinery runs in April by about 500,000 bpd to ensure that exports can remain steady while production declines. However, Russia traditionally does maintenance on its refineries in April and May, so lower refining runs are typical for this season.
This means traders should keep a close eye on Russia’s production in May and June because the country may be testing global appetite for its petroleum products in April and May by cutting supply.
If it sees strong demand for both products and crude oil, Russia may increase oil production in order to satisfy both domestic and international demand despite verbal commitments to maintain its production cut.
Even though Europe has stopped importing Russian diesel and other products, Gulf countries like Saudi Arabia and the UAE have stepped up their imports of Russian products. These are either being used domestically or stored in facilities in the Gulf and resold.
The takeaway for oil traders is that the Russian oil situation is much more complicated than the headlines portray. Russia might say it is cutting oil production, but that doesn’t mean that the amount of oil it is putting on the market has been reduced.
The interplay between products and crude oil is crucial. Traders should also not expect Russia to necessarily abide by its commitments if demand for its crude oil and petroleum products exceeds what it says it will produce. Russia is out to make money, not friends.
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Disclaimer: The author does not own any of the securities mentioned in this article.