Oil prices rose on Friday after Russia announced a 5% cut in crude output in March. Following a wave of Western sanctions imposed on Russia’s oil trade, Russia’s deputy prime minister, Alexander Novak, announced Friday that Moscow will reduce crude production by 500,000 barrels per day beginning next month.
“We will not sell oil to those who directly or indirectly adhere to the principles of the price ceiling,” Novak said in a statement. “In relation to this, Russia will voluntarily reduce production by 500,000 barrels per day in March. This will contribute to the restoration of market relations.”
Brent crude prices jumped immediately after the announcement, reaching $85.21 per barrel. Prices later fell to $84.77 per barrel, a 1.75% increase.
The European Union agreed in December to cap oil prices at $60 per barrel and to impose a partial ban on seaborne crude imports.
As the Kremlin’s war in Ukraine enters its second year, Western nations are attempting to deplete President Vladimir Putin’s war chest. The penalties reduced Moscow’s revenue from oil and gas by about 50%.
According to the BP Statistical Review of World Energy, prior to the start of the war last year, Europe was the largest purchaser of Russian crude, importing approximately 138 million tonnes in 2020 out of Russia’s total exports of 260 million tonnes, or roughly 53%.
Russia supplies roughly one-quarter of Europe’s oil needs and is the world’s third-largest oil producer.
Nonetheless, some analysts believe the cap will have a little immediate impact on Moscow’s current oil revenue.
According to JPMorgan strategists, Russia could cut up to 5 million barrels per day (bpd) in retaliation for the price differential “without adversely affecting its economic interests.” Brent prices could soar to a “stratospheric” $380 per barrel in such a scenario.
The analysts said, “Given the high level of stress in the oil market, a cut of 3.0 million bpd could cause global Brent price to jump to $190/bbl, while the worst-case scenario, a 5 million bpd cut could drive oil price to a stratospheric $380/bbl.”