Built-in Capacity Constraints Limit Russia's Freedom of Maneuver

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Built-in Capacity Constraints Limit Russia's Freedom of Maneuver

Thu, 03/12/2020 - 13:20
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Built-in Capacity Constraints Limit Russia's Freedom of Maneuver (Factory_Easy / Shutterstock)
Built-in Capacity Constraints Limit Russia's Freedom of Maneuver (Factory_Easy / Shutterstock)

The global Corona pandemic is having a profound effect on energy markets, leading to a precipitous drop in demand for oil and oil products and forcing major oil producers like Saudi Arabia and the Russian Federation to increase production in a struggle for market share.

As the struggle plays out the Saudis have raised production to a current 13 million barrels a day and the Russians have stated that they too will ramp up to secure more of the market.

Yet Russia may not have the luxury to compete with the Saudis in this way. Indeed, their ability to do so is restrained by bottlenecks in exporting capacity. According to Reuters, Russian refineries hit peak season for maintenance in April and May, meaning more crude will need to be exported instead of being refined domestically.  

Russia has also still not struck a delivery agreement for this year with Belarus, which usually buys 1.5 million tonnes of Russian oil a month. Russia will ship around a third of that to Belarus in March, but the rest will need to be routed elsewhere.

“There is not much space in the pipelines for an output rise due to refinery maintenance and Belarus,” a source at a major Russian oil company said.

“Also, increasing output doesn’t make sense given low oil prices, especially for (expensive) offshore projects.”

“Spring is the worst time for Russia to increase output. Seasonal maintenance on domestic refineries leads to higher exports anyway, so if we add an output rise here, there is not enough export capacity,” a source with a trading firm working in Russia said.

Alexander Novak, the Russian Energy Minister, also said on Tuesday that Russia has not ruled out further joint action with OPEC to stabilize the oil market, a stance later repeated by the Kremlin.

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