Reduced refining capacity, stricter sanctions force Russia to cut oil output

Russia on Sunday announced additional voluntary cuts in oil supply mainly in the form of production cuts rather than exports, as it faced curtailed refining capacity as well as stricter sanctions, analysts said.

Russia has declared plans to cut its oil output and exports by an additional 471,000 barrels per day (bpd) in April-June in coordination with some OPEC+ participating countries.

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While the world’s second-largest oil exporter has been reducing 500,000 bpd in exports of crude oil and oil products in the first quarter, it has decided to scale down export limits in the second quarter and focus on production curbs instead.

Russia has suffered numerous outages and drone attacks at its large oil refineries since the start of the year amid the conflict with Ukraine.

Among the oil processing plants, which have reduced output, are Rosneft-owned Tuapse, Lukoil’s Volgograd and NORSI refineries as well as Novatek’s fuel processing and transhipment complex at the Baltic Sea port of Ust-Luga.

Maintenance at the NORSI oil refinery will likely take a few months, according to government officials.

Adding to the oil glut will be seasonal maintenance work at Russian refineries in the spring and autumn. Fuel production
during these months usually decreases, and crude oil exports increase.

Ronald Smith, a senior analyst with BCS brokerage in Moscow, said that Russia has little storage capacity for crude oil in order to be able to regulate exports.

“I can only assume that a signal of oil output cuts relative to ex-ports is indeed just a signal that the refinery repairs will take a few months, which is expected,” he said.

Russia plans to gradually ease the export cuts, Russian Deputy Prime Minister Alexander Novak said in a statement on Sunday.

In April, it will reduce output by an extra 350,000 bpd, with exports cut by 121,000 bpd. In May, the extra output cut will be 400,000 bpd and exports cut by 71,000 bpd. In June, all the additional cuts will be from oil output, he added.

Viktor Kurilov, a senior analyst at oil and gas consultancy Rystad Energy, said it was highly likely thаt the Middle Eastern partners asked for a bigger contribution of Russia to the OPEC+ production cut.

Russia had revised up its oil exports for last month due to more available crude amid decreased refining capacity.

“The focus on production may also be related to the fact that there is volatility in the structure of Russian oil and oil product exports,” he said.

“Perhaps, therefore, it is not an effective practice to impose strict restrictions on oil and oil products exports under current conditions.”

The West has also imposed wide-ranging sanctions against the Russian oil trade, while the United States also last month imposed sanctions on Moscow’s leading tanker group Sovcomflot, further hampering Russian oil exports.

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