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Low Refining Capacity and Sanctions Responsible for Russia’s Oil Output Cuts

Russia’s announcement that it would focus on cuts to oil production instead of exports in its voluntary supply reduction within OPEC+ in the second quarter could be the result of lower refining capacity in Q2 and stricter enforcement of the sanctions on its crude exports, analysts have told Reuters.

At the end of last year, Russia said it would deepen the export cut to 500,000 barrels per day (bpd) in the first quarter of 2024 – with May and June 2023 being the reference export levels for the cut. The cut this quarter consists of reductions in exports of 300,000 bpd of crude and 200,000 bpd of refined products.   

When the OPEC+ members announced on Sunday their intentions to extend the cuts into the second quarter, Russia changed its production/export cut plan and said that it in the second quarter it would reduce supply by 471,000 bpd in the form of cuts to oil production and exports. In April, Russia will reduce production by 350,000 bpd and exports by 121,000 bpd. In May, the 471,000 bpd reduction would be in the form of a 400,000-bpd cut to production and 71,000 bpd cut to exports, and in June the Russian supply cut would be 471,000 bpd entirely from production reductions.

Output cuts are now most of the extra Russian supply cut, and they could be the result of reduced refining capacity with maintenance coming in Q2 and refinery rates estimated to have slumped in February by 380,000 bpd compared to December levels, as several refineries are under repairs after being hit by Ukrainian drone attacks.

Russia doesn’t have enough crude storage capacity to be able to regulate its crude exports, according to Ronald Smith, a senior analyst with BCS brokerage in Moscow.

“I can only assume that a signal of oil output cuts relative to exports is indeed just a signal that the refinery repairs will take a few months, which is expected,” Smith told Reuters.

By Charles Kennedy for Oilprice.com

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