(Bloomberg) — Russia has finally decided to cut crude oil exports, at the most advantageous moment possible.
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Moscow has pledged to limit shipments to global markets by 500,000 barrels per day next month. It is a show of unity with Saudi Arabia, the OPEC+ leader, but also an attempt to answer months of questions about whether Russia can really cut oil production – as announced in February – while increasing crude exports at the same time.
August gives Moscow the perfect opportunity to make these important gestures at minimal cost. Companies can redirect crude away from export terminals to local refineries, which will operate at a higher rate thanks to the end of spring maintenance and a period of generous state subsidies.
Indeed, Russia should be able to meet its export target without the need for additional production cuts.
Victor Katona, chief crude oil analyst at market intelligence firm Kpler Ltd. “Seeking to strengthen its relations with Saudi Arabia, Russia is preparing to fulfill its pledge to reduce exports.” from the domestic refining sector.
Russian officials have given repeated assurances that the country’s production cut of 500,000 barrels per day was implemented in March. But there is no official data to support this – the numbers were compiled in April – and tanker tracking data shows exports rising steadily from that month through mid-May.
This was happening at a time when Saudi Arabia was making additional voluntary production cuts, leading some market observers to conclude that the kingdom was shouldering most of the burden of balancing the global crude oil market. While Riyadh has not publicly questioned the veracity of Moscow’s production allegations, it has urged greater transparency.
Saudi Energy Minister Prince Abdulaziz bin Salman said last week in Vienna that Russia’s announcement on oil flows in August is “more important” because it applies to exports.
Seaborne shipments of Russian crude oil are starting to show signs of decline. Exports from the country’s western ports in the four weeks through July 9 fell significantly from their average in February for the first time, after volumes rose during the intervening months, according to ship-tracking data spotted by Bloomberg and confirmed by other data sources.
Rystad Energy A/S expects daily seaborne Russian oil shipments to fall next month to 3.1 million to 3.2 million barrels, compared to around 3.7 million barrels in April and May. Less crude oil will be loaded onto tankers for export due to the “seasonal increase in refinery utilization” within the country, according to senior oil market analyst Victor Kurilov.
And setting the pattern for the month of August, downstream facilities in Russia are already starting to pass through crude oil. As of early July, domestic oil processing rates are at a 12-week high, according to Bloomberg calculations based on industry statistics.
Those refiners receive government subsidies to sell some gasoline and diesel at home at an average of $1 billion per month in the first half of the year, according to Bloomberg calculations based on ministry data.
When Deputy Prime Minister Alexander Novak announced a 500,000 bpd export cut, he did not provide a baseline for the adjustment. This makes it difficult to assess how much crude oil the country will actually ship abroad in August, and the resulting impact on prices.
“It has to do with the number of Russian barrels being removed,” said Giovanni Stonovo, an analyst at UBS Group AG. “If the baseline is May exports, the effect is likely to be modest” because shipments that month were so high, he said.
If Russia offsets the decline in crude exports with an increase in shipments of refined fuels from its domestic refineries, he said, the impact could be more modest.
Oil has risen since Moscow and Riyadh announced cuts in August. Russia’s main Urals crude topped $60 a barrel on Wednesday, breaching a price ceiling imposed by the Group of Seven. Brent crude topped $80 a barrel for the first time since May, but the international benchmark is still down this year.
The window of opportunity for Russia to cut oil exports while keeping production largely intact is a short window. The real test of Moscow’s willingness to sacrifice volumes will come in September. That’s when the country’s finance ministry plans to cut generous fuel subsidies in half and keep them on leash until 2026, according to Russia’s Kommersant newspaper.
The change will reduce the appetite of domestic refiners for crude, which will not be able to raise domestic prices for gasoline or diesel to make up for the lost incentives, said Mikhail Torokalov, an independent oil products analyst based in the US. As a result, he said, Russian companies will be more interested in selling to international markets, provided the government does not introduce export quotas.
Torokalov said Russian refineries will also be in peak fall maintenance season in mid-September. At this point, the country’s daily crude oil processing could drop to 4.76 million to 5.1 million barrels, compared to 5.35 million to 5.57 million in August, he estimated, based on initial maintenance plans for the facilities.
These factors will make it more painful for Russia to extend export cuts beyond August, according to Kpler and Rystad Energy.
Curbing foreign shipments in September “will require further production cuts,” Kurilov of Rystad said. “As we have seen, Russia cannot do this quickly.”
(Updates with Urals and Brent prices in paragraph 16).
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