Russian production cut to speed up the move towards tighter supply
On Friday, Russia announced a unilateral cut in its March crude oil output by 500,000 barrels a day, apparently without consulting with its OPEC+ partners first. Since the introduction of EU and G7 sanctions on crude oil from December and fuel products from early February, Russia has increasingly been forced to cut its selling price as its client base continued to dwindle. While talking about retaliatory measures the move has probably more to do with the lack of demand forcing the reduction in order to reduce the discount Russia is currently forced to sell its crude and fuel products at.
While jumping 3% on the news, Brent crude oil continues to trade within a range that has prevailed since November. However, the output reduction, which is the equivalent of about 5% of Russia’s January output, will support and potentially speed up a move towards higher crude oil prices – a development that was not expected until later in the year when a pick-up in Chinese demand became more apparent. If that ends up being the result, the focus will return to OPEC and its resolve to maintain stable prices by potentially adding barrels to offset the loss of Russian barrels at a time where global demand look set to remain robust.
Brent crude, rangebound since November traded above its 21-day moving average on Friday, still below the trendline from the 2022 high and recent resistance in the 89 to 90 area. In our outlook, we look for Brent to spend the first quarter trading in the 80’s before moving into the 90’s as demand picks up. The Russian decision may speed up the timing of a break. However, in the short-term, US data – especially next week’s CPI print – may hold an equally large sway over the market given its potential impact on risk appetite and the dollar.