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Oil prices jump as Putin’s Russia announces oil production cuts

By Sarah May on
 February 12, 2023

Amid the ongoing economic warfare conducted by President Joe Biden and America's Western allies in response to Russia's invasion of Ukraine, oil prices spiked Friday after Moscow announced that it would slash production by roughly 500,000 barrels a day starting in March, as Fox Business reports.

Russia's move, which signals production cuts of roughly 5%, was made in protest of a new round of energy price cap sanctions imposed by Western countries as a result of the continued Kremlin-led aggression in Ukraine.

Russia announces production cuts

In declaring his country's intentions, Russian Deputy Prime Minister Alexander Novak said in a statement Friday, according to the New York Post, “As of today, we are fully selling the entire volume of oil produced, however, as stated earlier, we will not sell oil to those who directly or indirectly adhere to the principles of the 'price cap.'”

The effect of the move, in Novak's estimation, was to “contribute to the restoration of market relations.”

Blasting recent European Union (EU) actions against Russian oil products and a Group of Seven price cap, Novak decried what he characterized as “interference in the market and a continuation of the destructive energy policy of the countries of the collective West,” as Barron's noted.

Russia's decision to slash production does not come as a complete surprised, as Moscow had repeatedly issued warnings in recent months that retaliatory actions would ensue if price caps were put into place.

Sanctions intensify

As Barron's explained, Western nations have implemented a host of significant sanctions on Russia ever since the conflict in Ukraine commenced last year.

On Sunday, an EU ban on products including gasoline, diesel, and jet fuel went into effect against Russia, as did the Group of Seven price cap.

The caps come at two threshold levels, $100 per barrel on costlier goods such as diesel and $45 for fuel oil and other lower-quality items.

Those sanctions are intended to build upon an existing embargo by the EU on oil deliveries by sea, a measure which went into effect in December, along with a G7 price cap of $60 per barrel on the majority of Russian oil shipments.

Impact builds

Prior to the initiation of the conflict in Ukraine, Europe represented the largest purchaser of crude oil from Russia, as Fox Business noted, and as such, the sanctions instituted by the West are undoubtedly having an appreciable impact, but whether it is a significantly determinative one in terms of the war is something that remains unclear.

Barron's noted that in the estimation of European Commission President Ursula von der Leyen, the price cap results in revenue losses for Russia that are the equivalent of $170 million per day.

The outlet also quoted Commerzbank analyst Carsten Fritsch, who said, “Until recently, Russia had been able to offset the discontinued oil shipments to the West by selling more to Asia, especially China and India.”

However, he continued, “the price caps have resulted in Russia only being able to sell its oil at significant discounts on international oil prices, leading to a marked decline in export revenues,” in apparent furtherance of the Western nations' overall goals.

Price spike, supply cuts breed uncertainty

In response to Russia's announcement, the American oil benchmark, West Texas Intermediate crude, rose in excess of 2%, reaching $79.72 per barrel.

The international benchmark, Brent crude, jumped 2.2% to reach $86.39 per barrel, as the Post noted.

Giovanni Staunovo of UBS Group AG noted that over the short term, there is no actor on the international scene poised to fill the supply gap resulting from Russia's cuts, with predictably uncomfortable consequences to follow.

“Lower Russian production together with China's reopening [from years of pandemic restrictions] should tighten the oil market further over the coming quarters,” Staunovo added, but precisely how much that will be felt by American consumers, remains to be seen.