Russia expects temporary output drop from potential oil price cap

Russian Deputy Prime Minister Alexander Novak said Oct. 5 that a planned price cap on Russian oil could result in a temporary drop in production.

Novak's remarks came in an interview with Bloomberg TV.

Russia has said it would respond to such a cap by suspending exports to countries that introduce it. Another risk to output and export volumes comes from EU restrictions on Russian oil and oil products exports, as well as shipping insurance, set to come into force by early 2023. These are expected to accelerate a trend for Russia to redirect significant volumes away from traditional markets to non-sanctioning countries.

S&P Global Commodity Insights estimates that 3.5 million b/d of previous Russian oil exports to Europe will need to be rerouted by Feb. 5, of which two-thirds will be able to find new buyers.

Russia's oil output has already been significantly impacted by Western sanctions introduced in response to its invasion of Ukraine.

Related infographic: Sanctions on Russian commodities tracker

The biggest hit to date came in April when output dropped to 9.14 million b/d, according to a Platts survey by S&P Global Commodity insights published in May. It has since recovered and was assessed at 9.77 million b/d in August but remains below the February figure of 10.11 million b/d.

Russia and its OPEC+ allies agreed Oct. 5 to cut 2 million b/d for the next 14 months. This will impact Russia less than some other producers, as it is already producing below its quota, which was 11.004 mil b/d for October and will drop to 10.478 under the new deal.

Russian crude is already trading at significant discounts. The latest Platts assessment of its key crude grade Urals was $70.62/b Oct. 5, according to S&P Global. This compares with Dated Brent at $95.24/b. Since the invasion, discounts have been as much as $40/b. Prior to the invasion, Urals was trading at a discount of around $10/b to Dated Brent.

Russia currently forecasts a further drop in the Urals price over the next three years -- to $70.10/b in 2023, $67.50/b in 2024 and $65/b in 2025. Its 2022 forecast is $80/b.