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Russia Announces Oil Production Cut, Prices Set for Significant Rise

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CEM REPORT, ENERGY | Vladmir Putin and his Russian government has announced an oil production cut of 500,000 bpd as response to the Western Petroleum products price cap announced last week. This is according to Deputy Prime Minister Alexander Novak.

As usual of the oil market, prices reacted on Friday upon the announcement while bracing up for higher gains in the weeks ahead. WTI was doing $79.43 as at the time of this report with a gain of 1.76%. Brent crude traded at $86.13 after rising by 1.93%

In December, the international Price Cap Coalition imposed an oil price cap on Russian seaborne crude oil set at maximum price of 60 USD per barrel for crude oil and is adjustable in the future in order to respond to market developments.

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According to Ursula von der Leyen, President of the European Commission, the decision was taken by the G7 and all EU Member States to have a hard hit on Russia’s revenues and reduce its ability to wage war in Ukraine.

While the oil price cap of 60 USD per barrel was announced for crude, petroleum products price cap was announced to take effect by February 5 which culminated into the full implementation last week.

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Two price levels have been set for Russian petroleum products: one for ”premium-to-crude” petroleum products, such as diesel, kerosene and gasoline, and the other for ”discount-to-crude” petroleum products, such as fuel oil and naphtha, reflecting market dynamics. The maximum price for premium-to-crude products will be 100 USD per barrel and the maximum price for discount-to-crude will be 45 USD per barrel.

Ursula von der Leyen, President of the European Commission, reiterated reason for the prices cap: “We are making Putin pay for his atrocious war. Russia is paying a heavy price, as our sanctions are eroding its economy, throwing it back by a generation. Today, we are turning up the pressure further by introducing additional price caps on Russian petroleum products. This has been agreed with our G7 partners and will further erode Putin’s resources to wage war. By 24 February, exactly one year since the invasion started, we aim to have the tenth package of sanctions in place.”

The price cap on petroleum products will be implemented from 5 February 2023. It includes a 55-day wind-down period for seaborne Russian petroleum products purchased above the price cap, provided it is loaded onto a vessel at the port of loading prior to 5 February 2023 and unloaded at the final port of destination prior to 1 April 2023.

Since the start of war and the earlier sanctions to dissuade Russia from continued attack on Ukraine, Putin’s government has always found some tactics to cope. One of those tactics is strengthening its alliances with the Asians especially China.

Could this production cut be another strategy to effect the world with the impact of the oil and petroleum product price cap? Thought in this regard is elucidated by the hike in prices the cut will have on global oil market which negates the second expected benefits of the price cap action by the G7 and EU Member States.

It is projected the price cap will also help address inflation and keep energy costs stable at a time when high costs – particularly elevated fuel prices – are a great concern in the EU and across the globe. Now if prices of crude oil increases following the production cut by Russia, the consequent increases in petroleum product might be inevitable.

Coupled with the projections of around 1.0 million barrels a day Chinese demand for crude, the Russia production cut could send prices to rise to a level where it could augment fairy the shortfall of revenue for Russia.

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