On March 21, Russian Deputy Prime Minister Alexander Novak announced that Russia would extend earlier oil production cuts through the end of June. Russia’s Minister of Energy said that lower Russian production would increase prices on global oil markets, allow Russian oil to sell at a higher price, and generate more export revenue for the federal budget. Russia’s decision follows OPEC+’s October 2022 agreement to reduce oil production by 2,000,000 barrels/day, and preceded a second OPEC+ announcement on April 4 to slash output by an additional 1,160,000 barrels/day. The combined pledges would trim OPEC+ oil production by 3,660,000 barrels/day, equivalent to 3.7% of global demand. Following the April 4 pledge, Saudi Arabia will cut approximately 500,000 barrels/day, while other Middle East major producers including the UAE, Kuwait, and Iraq, will also cut production by a combined 483,000 barrels/day.
Why it matters: Russia’s production cut represents a new effort to undermine the U.S. and EU price cap on Russian oil shipped with Western insurance and to maintain Russia’s oil earnings. While some intermediaries, like shippers and refiners, have benefited from these and other sanctions, Russia’s federal budget has lost billions of dollars in revenue. The IEA notes Russian oil export revenue fell by $2.7 billion from January 2022 to January 2023, while natural gas revenue dropped over 40% in January and February 2023 compared to the same period in 2022..
A top Russian official suggested that Russia’s unilateral production cut was in part a response to a Western banking crisis and its potential impact on oil demand—a position that allows Moscow to blame the United States and its allies for the reduction. The parallel production cuts by Russia and its OPEC+ partners has previously drawn the ire of the U.S. and its allies, which claim OPEC+’s manipulation of oil markets is helping finance Russia’s invasion of Ukraine. That said, the Biden administration has taken a more cautious tone than in some past responses to Saudi production cuts, perhaps due to its limited options, a desire to avoid further deterioration in U.S.-Saudi ties, and an electoral calendar that allows greater flexibility than administration officials enjoyed last fall. Yet the OPEC+ production cut drives oil prices up significantly, a greater gap between the price cap and market prices for Russian oil could challenge the policy—and contribute to a new round of inflation.