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Russian Rage and Revenge. The Energy Report
By: Phil Flynn | February 10, 2023

Russia is showing its rage against the world by unleashing one of the biggest missile barrages against Ukraine since the beginning of the war and by announcing a 500,0000 barrel-a-day oil production cut. They are threatening not to sell oil to any country involved in the EU price cap.

As reports surfaced that Russia launched the biggest wave of missile strikes in weeks and one of the largest since the war began, Russia’s Deputy PM Novak announced that Russia would cut oil production by 500,000 barrels a day starting in March and OPEC said they would not make up the difference. Russia’s Novak said he did not consult OPEC about the production but that statement is probably an attempt to give the cartel some political cover saying that they are not supporting Russia but just staying the course on previously agreed-upon production levels.

Yet Russia’s Novak didn’t stop with just an oil production cut. Mr. Novak made a threat that Russia will not sell oil to those who directly or indirectly adhere to the price cap. Mr. Novak correctly said that the price caps interfere with market relations and may lead to cuts in investment in the oil sector and oil shortages.

Novak also warned, in what could be a veiled threat, that the price caps could be applied to other global economic sectors. That could be a threat to grain and perhaps platinum and palladium that the Biden administration will need in its push for electric cars. Russia is the world’s top producer of palladium and the world’s second-largest producer of platinum.

There is also a threat that Russia’s aggressive attitude could block Ukrainian grain exports in what will be a much smaller Ukrainian crop.

The reports caused oil to spike over $80 and open up the door for a test of $84. Oil products also should see bottoming action off of this move. If there were not some demand concerns based upon recent US data showing rising inventories all year, the move would have been larger. We think that when US inventories start falling, as we predict that they will soon, then we will see the longer-term impact of the Russian cut.

The other headwind was the dollar. It popped as we saw a bit of risk aversion. There is also a possibility that the Biden administration may react by releasing more oil from the SPR. Of course, that will only kick the can down the road and raise the risk later in the year.

Natural gas is also desperately seeking the bottom. Reports that the Freeport LNG terminal is giving permission to resume some ship loading may be a reason for optimism but a reason for pessimism is weather should be above normal. I sure wish that the back-month natural gas options had some open interest.

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