Russia Faces Oil Cuts as Sanctions and Strikes Hit Supply

Russia may be forced to scale back oil production in the coming months as U.S. sanctions limit tanker access and Ukrainian drone attacks damage key refineries, industry sources say.

The latest U.S. sanctions, imposed in January, targeted 180 Russian tankers, restricting Moscow’s ability to transport crude to Asia, its biggest market. Meanwhile, Ukraine has intensified drone strikes on Russian oil depots, refineries, and pipelines, further straining the industry.

According to three Russian oil executives, Moscow has no choice but to reduce output as crude stockpiles grow and refining capacity declines. Limited storage facilities and ongoing drone attacks have made maintaining current production levels increasingly difficult.

Declining Exports and Oil Glut

📉 Russian crude exports are already shrinking:

January shipments from western ports (Primorsk, Ust-Luga, Novorossiisk) fell 17% year-on-year, Reuters data shows.
Russia no longer discloses official export figures, but traders confirm a growing surplus of crude.
With refineries shutting down and storage space filling up, production cuts seem inevitable.

The impact is expected to start small, with output dipping below 9 million barrels per day (bpd), but could accelerate if the tanker crisis persists, executives say.

Tanker Shortages and Rising Costs

🚢 The shadow fleet, Russia’s workaround for sanctions, is under pressure:

Shipping costs from Russia’s Pacific port of Kozmino to China have risen fivefold since the latest sanctions.
Chinese and Indian ports have restricted access to sanctioned vessels, forcing buyers to seek alternative suppliers like Saudi Arabia and Iraq.
Oil stored on tankers has surged to 17 million barrels, with Goldman Sachs estimating it could hit 50 million barrels by mid-2025.

🚢 Russia is scrambling to adapt:

Buying smaller Aframax tankers (instead of large VLCCs) to circumvent restrictions.
Aframax tanker prices have jumped from $15 million to $40 million since last year.
Freight costs for Aframax shipments to China have risen from $1.5 million to $7.5 million.

Ukrainian Drone Strikes on Refineries

💥 Kyiv has intensified attacks on Russia’s energy infrastructure:

Eight major refineries have been hit since January, knocking out 10% of refining capacity.
Ryazan, Volgograd, and Astrakhan refineries have halted fuel production, with repairs expected to take weeks or months.
Ukraine has also struck oil storage facilities and pumping stations, disrupting flows to export terminals like Ust-Luga, where loadings fell to a four-year low in January.

Economic Impact and OPEC+ Strategy

📉 Putin already faces a growing budget deficit:

Russia’s oil revenue for 2024 is estimated at $192 billion, accounting for nearly half of total federal income.
Since the war began, Russia’s budget deficit has exceeded $100 billion, finance ministry data shows.

📉 OPEC+ production cuts complicate Moscow’s options:

Russia previously agreed to limit output to support oil prices.
However, sanctions and supply disruptions may prevent Russia from increasing production, even as OPEC+ plans to ease output cuts from April.

What’s Next?

🛢 Can Russia maintain oil exports despite sanctions?
Experts are divided. The International Energy Agency (IEA) has repeatedly predicted a sharp decline in Russian oil production—but so far, Moscow has adapted.

However, a Russian oil executive acknowledged growing difficulties:
"The level of complexity involved in refining and selling oil is becoming too much. Everyone is waiting for this war to be over."

With Trump signaling possible new sanctions if diplomacy with Putin fails, the future of Russia’s oil industry remains uncertain.

($1 = 95.89 roubles)

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