WASHINGTON (DTN) -- West Texas Intermediate futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange advanced more than 2% Friday after Russia announced a unilateral 500,000-barrels-per-day (bpd) production cut for March in retaliation for Western sanctions on its oil and product exports as OPEC+ producers are not expected to raise crude output to offset Russian losses, according to the delegates.
Russia's Energy Minister Alexander Novak said Friday morning Moscow would decrease oil production next month, catching markets and colleagues from OPEC+ coalition by surprise. "Russia has not held any consultations on oil curbs. Moscow believes that the mechanism of price caps on Russian oil and petroleum products is an intervention in the market and an extension of destructive energy policies of the collective West." said Novak.
The fact that Russia chose to act unilaterally without a forward guidance to the markets or OPEC+ members could be a canary in the coal mine for further price volatility.
So far, Russian oil production has been surprisingly resilient in the face of Western sanctions, rebounding to 10.9 million bpd from post-invasion low of 10.5 million bpd in April. Major forecasting agencies this week revised higher their estimates for Russian oil production this year and in 2024. The announced cut would depress Russian oil output to 10.3 million to 10.4 million bpd.
Additionally, Moscow's move would deepen the 2-million-bpd supply curb announced late last year by OPEC+, which Russia leads along with Saudi Arabia. At a committee meeting earlier this month, ministers from the coalition saw no need to change their production limit, which lasts until the end of 2023. As of this morning, OPEC+ delegates said Moscow's decision to unilaterally reduce production would not change forward policy. The situation remains fluid.
Elsewhere, Turkey's export port of Ceyhan on the Mediterranean coast remained closed on Friday after a 7.8-magnitute earthquake struck the region, disrupting infrastructure and killing over 25,000 people. Turkish President Tayyip Erdogan estimated that some areas affected by the disaster will be "uninhabitable for years." Ceyhan is a key export hub for Azeri, Kazakh and Iraqi oil exports, processing around 1 million barrels daily. That accounts for roughly 1% of global oil supply. On Thursday, BP Azerbaijan declared force major on crude loadings along the Baku-Tbilisi-Ceyhan (BTC) pipeline as further assessments are carried out on pipeline operations. Bloomberg News further reported that Azeri crude loadings toward the Turkish port are unlikely to restart until late next week. Making matter worse, wire services reported that one or two storage tanks at the Ceyhan port might have sustained damages despite earlier assurances from Turkish officials that the port has been unscathed by the earthquake. In absence of clear information, the disruption at the Ceyhan port will continue to support oil prices into next week, adding to concerns over available oil supplies on the global market.
Near 7:45 a.m. EST, WTI futures for March delivery climbed to $79.63 bbl, up by $1.58 in overnight trading. The international crude benchmark Brent contract on ICE spiked to $86.28 bbl, up $1.81 bbl. NYMEX RBOB March contract rallied $0.0528 to $2.5003 gallon, and March ULSD futures added $0.0555 to $2.8709 gallon.
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