the fall in Russian production begins to put pressure on the world market

As a result of the war in Ukraine and Western sanctions, crude oil production in Russia, which is one of the world’s top three producers along with Saudi Arabia and the United States, fell sharply in April, while it remained relatively stable in March. , after the invasion of Ukraine decided by President Vladimir Putin. “Much less crude oil was refined due to weak exports of petroleum products and falling domestic demand after Western sanctions”indicates the International Energy Agency (IEA) in its monthly report released on Thursday.

The agency estimates a one-month drop in oil, condensate and NGL (liquefied natural gas) production of 960,000 bpd, which fell to 10.4 million bpd (bpd). This is the lowest level since November 2020. For crude oil production alone, the drop is 900,000 bpd to return to 9.1 million bpd, i.e. 1.3 million bpd less than the production quota granted under the OPEC+ agreement.

Rosneft is the most affected company

According to the IEA, Rosneft, Russia’s leading oil company, has been hardest hit by the decline in production. Add to this production interrupted by the exit of foreign companies such as Exxon Mobil, which, under the pressure of sanctions, has been severely affected by the production of 300,000 barrels per day at the Sakhalin-1 field in anticipation of a full withdrawal from the country. .

The effects of the sanctions – despite the European Union having been discussing an embargo on Russian oil imports for weeks without reaching an agreement – in addition to a lack of storage capacity that is forcing Russian producers to close wells, should lead to a further drop in production. production in April will be 600,000 barrels per day, IEA experts have calculated.

Cumulatively, Russian production has fallen by 1.6 million bpd since February, a level that could reach more than 2 million bpd in June and nearly 3 million bpd in July. Finally, production could fall to 9.6 million barrels per day, the lowest level since 2004, the IEA said, which cautiously reminds that these estimates are subject to change depending on the development of the situation.

This loss of Russian production contributes to a 710,000 bpd decline in global crude oil supplies to 98.1 million bpd. This is partly offset by increased supply from OPEC+ producers in the Middle East and the US, as well as slower growth in global demand. With the exception of Russia, May production is actually expected to increase by 3.1 million barrels per day.

“Crude oil prices are down 8% month-on-month on weaker demand forecasts in China driven by the Covid-19 lockdown, coordinated action to draw on strategic reserves, and a strong strengthening of the dollar and interest rates.”OPEC experts note in their latest monthly report released on Thursday, stressing that market fundamentals show that supply remains tight as the summer season approaches, in line with peak fuel demand.

Low inventory

This perception is also reinforced by the position of world stocks. The IEA points out that global inventories fell by 45 million barrels in March, 1.2 million barrels below June 2020 levels. stocks. stock. The latter only in the OECD countries increased by 3 million barrels and reached 2.626 billion barrels. However, they remain 299 million barrels below the five-year average.

Even more critical is the situation with oil products, especially diesel fuel, whose stocks have fallen to extremely low levels. Prices for middle distillates fell to their lowest level since April 2008. The agency says shortages are starting to cut shipments in several African countries, with a more worrisome situation emerging in Yemen and Sri Lanka.

“Limited additional capacity in global refining, as well as reduced exports of heating oil, diesel fuel and naphtha, exacerbated tensions in markets for these products, stocks of which have been declining for seven consecutive quarters.”highlights the IEA.

Increasing refining margin

The case with diesel is indicative. Prices in Northern Europe have quadrupled since their low in March 2020 (see chart). The Old Continent has a large fleet of diesel vehicles, but has not adapted its refining capacity to meet this particular demand for years, forcing it to rely on imports. However, the first supplier of diesel fuel to Europe is Russia, whose market is closed due to sanctions.


Finally, another source of tension: Refiners, especially in the United States, have been favoring kerosene production at better margins in recent months to meet demand driven by the resumption of air traffic, which has been done at the expense of diesel production. For comparison, if you take into account the refining margin, then for a barrel of WTI oil in the US, which on Friday cost about $110, a barrel of diesel fuel is equivalent to more than $250!