Russia's upcoming production cuts might not be as relevant as you would think...

Russia's announcement to cut production might be seen as relevant, by looking at how Brent and WTI first month prices are responding as of now, but its effects will most likely wane in a few days. First of all, the country did not clarify which production base they will be using to calculate their new supply. So, it is likely that this announcement is simply formalizing the reduction that Russia has already seen over the last year, as the country struggled to move flows away from Europe, sending them to Asian destinations.

Before the war Russia's production hovered 11.2 million b/d. Their net production will likely be between 9.2 mmb/d and 10.2 mmb/d at the most by mid 2023.

This is what I was warning about just yesterday in the article related to geopolitics: the Sino-Russian group will do their best to influence crude prices and move towards a de-dollarization of oil transactions.

But, as I mentioned in the article related to high interest rates seen in central banks around the world, both Russia and OPEC will have a harder time to influence market, as the months go by. The highest the returns for financial investors picking foreign exchange as investment strategy, the less dollars for oil markets contracts, the less volatility in oil markets. So, if Russia and OPEC want to bring crude prices above $100/bl again, they will have to announce production cuts of around 1.3 million b/d, or so, between now and May. Without such announcements, Brent prices might be hovering the $75/bl to $85/bl window for most of 2023.

The other option is a geopolitical event (China-Taiwan-Japan-Iran-Israel, among others), which would trigger financial jitters and prompt up crude prices.

All in all, oil markets are getting more interesting by the day...

Jaime Brito

Energy expert