Russia starts reducing its oil output by 500,000 barrels per day (bpd) from March 1 in a one-month production cut that is intended to “stabilise the market,” according to Deputy Prime Minister Alexander Novak, who added the decision had been taken voluntarily without consultation with OPEC+ countries.

The decision to cut output comes a month after the EU imposed its latest oil embargo on Russian refined products on February 5 that led to speculation that Russia was having trouble finding customers and had been forced to cut production.

However, in February Russia’s oil production not only remained steady, but climbed back to over 11mn bpd, higher than the level of production on the eve of the start of the Russo-Ukraine war a year ago. Moreover, as bne IntelliNews reported, it seems that with somewhere between 400-600 tankers in its growing “ghost fleet” Russia has the logistical capacity to carry all its output to non-aligned markets.

Novak added that the reduction would only affect oil output, and gas condensate would be excluded from the cuts. The oil production quota would be distributed evenly among companies, depending on their level of production. Novak stated earlier that the voluntary reduction of crude production by 500,000 bpd was only for March.

A TASS source in the industry clarified that the production cut would be calculated from the real volume of output, not Russia's production quota under the OPEC+ deal. According to the agreement, Russia is expected to produce 10.478mn bpd from November 2022. However, as Novak previously mentioned, Russia produced approximately 9.8-9.9mn bpd in January 2023.

After three weeks of the new embargo, it appears that they are having little impact on either the price or volume of oil production.

As bneIntelliNews reported, the apparent deep discounts being offered for Russia’s Urals blend of oil are becoming increasingly meaningless. A recent study by Social ScienceResearch Network (SSRN) found the real price of Russian oil is closer to $74 per barrel than $50 and on a par with the Brent benchmark prices. The Urals discount to Brent at the end of 2022 was only $7.

At the same time, production has remained well above the pessimistic forecast made at the start of the war. In the week of February 17-24, offshore oil exports from Russia rose to 3.63mn bpd, Bloomberg reported in its weekly review. This is close to the all-time high of the war: only four times since the beginning of 2022 has Bloomberg recorded a higher weekly figure.

Such a high level of supplies was especially unexpected given that the main Black Sea export port, Novorossiysk, was closed for most of the week due to a storm. But the reduced volumes were more than offset by the growth in supplies from the Far Eastern ports, which, most likely, set a historical record, writes Bloomberg. The main buyers are India (about 2mn bpd) and China (1.1mn bpd), The Bell reports.

Analysts are closely watching to see if the new embargo affects the volume of exports to China and India this month.

Chris Weafer, the founder and CEO of Macro Advisory and former head of research at multiple Moscow-based investment banks, told bne IntelliNews in a recent podcast on oil that the March production cut was likely the Kremlin “testing the water” to see what influence it still has on the international price of oil and also to buy time to put in place delivery contracts with new customers after EU banned the import of refined products.

Shortly after the war started last year the export of Russian crude oil collapsed as traders self-sanctioned and stopped buying Urals. It took about two months for the market to find a new equilibrium and for Russia to switch the bulk of its export from Europe to Asia. By the autumn Russia had successfully reorientated the whole of the circa 3mn bpd of European exports to Asia, most of it being absorbed by China and India.

Demand from China continues to rise. Previously only privately owned refineries were buying crude as the state-owned refineries were nervous about bringing down sanctions on themselves. However, those fears seem to have faded and state-owned refineries are now also reported to be ordering Russian crude deliveries.

Russian exports of discounted crude and fuel oil to China jumped to record levels in January as the re-opening of the world’s biggest energy importer gathered pace after the dismantling of Covid Zero restrictions.

Russia’s crude and fuel oil exports to China reached 1.66mn bpd in January, according to Kpler data as of February 20 – more than the previous record set in April 2020 when the Asian nation was emerging from its initial virus restrictions. Crude and condensate flows rose to 1.52mn bpd, just short of a record set almost three years ago. Indians are importing similar amounts.