Crude Oil Trade: Russia’s production and shipments up, but coronavirus could alter the trend

Russian oil output has again approached record high levels last month, with January's production estimated at 11.28 million b/d, including gas condensate. OPEC+ is meeting in Vienna, earlier than previously scheduled, to address the impact the new coronavirus outbreak in China could have on global oil demand. Meanwhile, some Middle Eastern producers have been over-delivering after the Libyan supply collapsed due to a blockade of ports and oilfields.

Focusing on seaborne trade flows of Russian crude oil, cargoes loaded last month reached five million b/d again, levels last seen in October 2019. As data by IHS Markit Commodities at Sea shows, most additions came from the Baltic Sea, from which Russia shipped around 1.7 million b/d last month, the highest since July 2019. Flows from other regions remained close to last year's average. No dramatic change has been reported in terms of destinations, but it has become clear that the country has been recently replacing Libya to an extent.

Meanwhile, the scenario of OPEC+ further deepening their production cut now seems possible, but it would require a massive effort from their side to halt the sharp decline in oil prices, driven by concerns that China's demand will be dramatically hit by the coronavirus outbreak. Russia's role will be significant in this direction.

Brent oil price fell below USD 55 earlier this week, with the downward trend further developing as the coronavirus death toll approaches 500. In early January, Brent oil price jumped close to USD 70 when Iran launched rockets at US military bases in Iraq. The global market anticipated fundamentals to improve in 2020, after Washington and Beijing took a first step in improving their relationship with the first phase trade deal. However, the impact of the coronavirus could threaten China's demand growth.

Last week, Russian Energy Minister Alexander Novak commented that more time will be required to monitor the situation before taking any decisions. The market dynamics have changed completely in such a short period. Hope has been already replaced by concern around the global economy's reaction, something that Moscow seems to fully understand. Russia managed to exclude condensate from levels of compliance at the December OPEC+ meeting, allowing the country to still meet its quota or coming in very close.

Meanwhile, Russia would also need to face another big issue. As Alexander Novak stated last week, the country's oil production could be affected by the taxation system on the oil industry. Instead of tax on production, the future system will be based on profit by 2024. In the past, Novak said he'd expect Russia's oil production to peak as early as 2021 due to high taxes and costs.

Posted 05 February 2020 by Fotios Katsoulas, Associate Director, Lead Analyst Tanker Shipping & Alternative Fuels, S&P Global Commodity Insights