Russia's crude production fall hastens, April output slides below 11-year lows

Russia's much anticipated crude production decline is well and truly underway, with output plummeting to over 11-year lows last month.

The key producer is struggling to keeps all its oil wells running as the West targets Russia's oil following the invasion of Ukraine, with crude output slumping by almost 1 million b/d in April, several industry sources and analysts told S&P Global Commodity Insights on May 6.

More production declines are likely in the coming months even as Russia looks to divert some of its barrels to its Asian customers, as the EU stepped up its sanctions against Russian oil.

Russia-based sources said the country's crude production fell by almost 900,000 b/d in April from March, and by more than 1 million b/d from prior to Russia's invasion of Ukraine, which began on Feb. 24.

Russian crude production averaged 9.1 million b/d in April, the lowest monthly figure since August 2010, according to S&P Global Commodity Insights. This was down 1 million b/d from March and nearly 1.1 million b/d below February, which was a post-April 2020 high.

"The trajectory of future shut-ins will hinge in large part on the policy response from Western governments to developments in Ukraine," Paul Sheldon, chief geopolitical adviser at S&P Global Commodity Insights, said.

If this trend persists, Russian crude production could slump to its lowest levels since 2003 by mid-2022, Sheldon added.

"We currently forecast monthly Russian crude production drop-offs of 670,000 b/d in May, 400,000 b/d in June, and 350,000 b/d in each July and August. A slower (or faster) timeline is clearly realistic, depending on future sanctions details as the war in Ukraine continues to evolve," he said.

Exports recover

Despite the output fall, Russian exports rose last month as seaborne loadings from the Baltic and Black Sea were unexpectedly persistent.

Demand from China and India for these barrels soared even as buying interest from Europe took a hit.

Russian seaborne crude flows rose to a 30-month high of 3.77 million b/d in April, according to data from commodity intelligence firm Kpler. This was a rise of 500,000 b/d from March, data showed.

Trading sources said the rise in exports was also due to a fall in domestic refining as its refineries were cutting runs.

Analysts at JP Morgan expect Russia to divert another 1 million b/d of oil flows from Europe to other buyers in the coming months.

"India, China and Turkey can likely import an additional 1 million b/d beyond what they are importing today, with China replacing other East Asia buyers of oil from Eastern Russia like Japan and Korea, and Turkey and India picking up cargoes of Russian oil from the Black Sea and Baltic ports opportunistically," JP Morgan said in a recent note.

On May 4, the EU said it planned to phase out imports of Russian oil into the trade bloc by year-end, setting the stage for a major upheaval in global oil trade, but it sparked a pushback from some EU members like Hungary and Slovakia, which are very dependent on Russia's crude.

Sheldon said the European ban is likely to tighten further if war conditions continue to deteriorate despite the US treasury secretary advocating a more measured policy measure.

S&P Global expected exports to fall by May 15, after which EU sanctions only permit "strictly necessary" transactions with Rosneft, Gazpromneft and Transneft.

Record discounts

The shunning of Russian oil by European refiners has pushed Russian crudes such as Urals to record lows.

The medium sour grade Urals was assessed at its lowest level ever relative to Dated Brent at minus $35/b CIF Rotterdam on May 5, according to S&P Global's Platts assessment.

The price of Russian Urals CIF Rotterdam averaged $69.89/b in April, according to S&P Global data. This compares with a monthly average of $104.40/b for the UK's Forties, which is similar in quality to Urals.

Russia is a significant supplier of oil to the world, exporting more than 7 million b/d of crude and petroleum products, or some 13% of the total oil trade.

Europe is particularly dependent on Russian oil and was importing about 2.7 million b/d of crude and another 1.5 million b/d of products, mostly diesel, before the invasion of Ukraine.

However, self-sanctioning by some European refiners and independent traders has already slashed seaborne flows of Russia's Urals crude, heavy fuel oil, vacuum gasoil and naphtha into the region.