MNI Commodity Weekly: Crude Markets Weigh Russian Production Cuts

Executive Summary:

• Russian Crude Production Cuts Signal Sanctions Are Making an Impact: Russia announced its decision to reduce crude production by 500,000 bpd by March, a move which shows Russia is feeling the impact of sanctions and is now trying to regain influence over the market.
• Heavy Venezuelan Crude Could Replace Russian Barrels for West: Western crude oil importers are looking at re-emerging Venezuelan barrels following the lifting of US sanctions as a potential replacement for sanctioned Russian barrels. Venezuela's relationship with the US remains frayed while the potential for higher crude exports is in the hands of the Biden Administration.
• Oil Markets: The impact of inflationary pressures on oil demand have taken over from Chinese growth optimism and supply concerns, despite the planned production cut from Russia in March.
• Gas Markets: US natural gas halts the two month decline as the restart of Freeport LNG draws closer. European gas also finds support with competition for LNG supplies from increased Asian interest.

Russian Crude Production Cuts Signal Sanctions Are Making an Impact:

Russia made the surprise announcement last Friday that it intends to cut its crude production by 500,000 bpd from March -circa 5% of its production levels - calling into question the motives for the plan and whether it will ruffle feathers with OPEC+.

• Russia did surprisingly well at maintaining crude outflows post December 5 sanctions as Asia snapped up increased discounted volumes. A move by Russia to reduce volumes on the market may give them the ability to try and narrow those discounts as volumes tighten.
• As a result of the discounts, the Kremlin’s January revenues from crude and fuel exports fell by more than a third from a year ago to $13 billion. This is despite Russia exporting 8.2 million barrels a day of crude and fuel in January – close to the February 2020 record.
• Crude markets jumped on the news initially on Friday but have sold off since as the markets indicate they are well supplied enough to ride out the cuts, especially with a backdrop of global economic weakness.
• The Russian government has proposed a switch to Brent-based price assessment from April, with the discount to the European benchmark to be narrowed gradually until it reaches $25 per barrel starting July. The discount is currently around $40/bbl. Production cuts may be required as part of this plan.
• The cuts may also be a sign that Russia is struggling to hold up current production levels without the full support of western services companies and would rather claim it is an intentional decision. Another reason is it could be a sign Russia is struggling to place all of the current volumes on the market as oil on the water increases and a higher number of vessels leave Russian ports without a destination.
• Russian crude and product exports are running at a very high rate currently. However, the supply chain is getting much longer and there is currently twice as much Russian oil at sea than before the Ukraine war, making up 11% of all oil on the water according to Vortexa.
• For global crude markets - signs that China’s economy is strongly rebounding poses a risk to oil markets as effective tanker capacities get pressured by longer journeys and Russian volumes start to slip. If Russia’s cut is a result of an inability to sustain production, it also leaves the door open for further cuts in the future when Chinese demand is likely even stronger.
• The US capacity to meaningfully raise production rates is limited, while Saudi is the only real member of OPEC that can raise rates but have signaled their intent to defend high prices of late. These combined factors have been the driving force for numerous bank forecasts on +$100/bbl oil later in 2023.

source: Bloomberg vessel tracking

Heavy Venezuelan Crude Could Replace Replace Russian Barrels for West:

Venezuela’s government and opposition resumed political talks in November which paved the way for the US to lift some crude sanctions and allow Chevron to expand its production in Venezuela. Despite sanctions easing, the country’s overall oil exports remain unsteady and tensions between the US and Venezuela are in the balance as President Nicolas Maduro repeatedly voiced discontent about the US license barring companies to pay cash for Venezuelan barrels – instead only allowing the flows to knock down outstanding debt.

• Despite frictions remaining, the easing US stance on Venezuelan exports signals that in the longer term, western importers could see re-emerging Venezuelan barrels as a chance to replace lost Russian barrels - something Northwest European and Gulf refiners are eager to replace. It is also logistically, ideally suited to do so, though export infrastructure is limited after years of underinvestment.
• Venezuelan crude oil exports in 2022 declined by 2.5% versus the year prior to 616.5kbpd because of infrastructure outages, US sanctions and rising competition. Crude production averaged 721kbpd in 2022, up by 13% on the year, but significantly lower than historical averages and well short of PDVSA’s target of 2mbpd.
• Venezuela’s exports of crude and fuel in January fell by 19% on the month to 558.4kbpd, signaling no steady ramping up of exports since the lifting of sanctions. The country exported 619.kbpd of crude in November.
• Chevron, who operate four joint venture projects in Venezuela, has ramped up production since the US eased sanctions. Output stood at around 90kbpd in February, compared with 50kbpd prior to sanctions easing. Production could rise to 200kbpd. The firm sent its first cargo of Venezuelan crude to the US end-December/early-January, the first cargo since 2018. The US pulled in 2.24-2.3mn barrels of Venezuelan heavy crude into the US in January and Chevron is planning to ramp up February exports. Preliminary loading programmes suggest exports will increase by 23% to 89,300 bpd, compared to 72,700 bpd in January. Chevron is picking up the cargoes via ship-to-ship transfers due to port infrastructure limitations.
• In Europe, Italy’s Eni and Spain’s Repsol received authorisation from the US State Department to take Venezuelan crude to Europe in exchange for outstanding debt. Both firms will load 4mn barrels of Venezuelan crude through March, marking the first Venezuelan cargoes this year for European refiners.

source: Refinitiv

Oil Markets:

Crude oil changed direction this week with economic driven oil demand concerns back in focus after a week of supply disruptions pushed prices from a low of below 80$/bbl earlier this month up to nearly 87$/bbl on 13 Feb.

• This week has seen volatile trading following the US CPI data on Tuesday which showed continuing inflationary pressures and concern for near term oil demand growth. Oil consumption would be boosted by a US and European economic recovery later this year.
• On 10 Feb Russia’s Novak announced plans to cut March output by 500kbpd in response to western sanctions. OPEC+ reportedly has no plans to adjust output despite the unilateral cut announced by Russia. The production cut added to other short term supply disruptions last week. Supply issues in Turkey, Norway, Kazakhstan, and the Black Sea have mostly eased with the resumption of exports from Ceyhan terminal and the restart of Norway’s Johan Sverdrup phase 1.
• Optimism over future Chinese demand and the lower oil output from Russia are supportive of both crude futures and time spreads. Monthly reports from the IEA and OPEC this week both raised the global demand forecast for 2023 citing Chinese demand as the key driver.
• Diesel and gasoline crack spreads have seen some support over the last week with tighter supplies balanced against weak demand and slightly higher inventory levels. Gasoline and diesel exports from the US Gulf Coast have fallen to their lowest in two years with limited fuel supplies due to the heavy maintenance season. Refinery outages are likely to remain high until April with the maintenance season following on from the winter disruption at the end of December.

source: Reuters

Gas Markets:

Global natural gas markets are still watching and waiting for further indications of the Freeport LNG terminal restart. The terminal comprises about 17% of US LNG export capacity at roughly 2 bcf/d.

• On 11 Feb federal officials said there’s no firm timeline for the resumption of full operations. Freeport has already received permission and resumed shipping services while asking for government authorisation to restart key units such as gas-liquefaction modules. Last weekend, the facility exported a partial cargo loaded from storage tanks with fuel that has been in the tank since before the plant shut in June last year. Pipeline natural gas feedstock supplies have been gradually increasing this month up from just 0.02bcf/d at the end of Jan to around 0.5bcf/d on Wednesday. The full restart of the facility requires further approvals with some analysts not expecting a restart until March.
• The expected Freeport resumption has halted the decline in US Natgas prices but high production, near normal natural gas storage and moderate demand are combining to limit the upside moves. The EIA drilling report released this week projected total natural gas output in the major shale basins will increase to a record 96.6 bcf/d in March. Front month Henry Hub is up from its lowest since 2020 at 2.35$/mmbtu on 9 Feb to around 2.55$/mmbtu.
• TTF prices have also picked up from an 18 month low of 51.5€/MWh on 13 Feb driven by the potential for cooler temperatures towards the end of February and increasing competition from Asia for LNG supplies. Traditional buyers such as Japan and South Korea increased imports in January and the more price sensitive South Asian buyers such as Thailand, Bangladesh and India are increasingly looking to secure LNG cargoes for the coming months.

source: Bloomberg

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