Ukrainian Drone Attacks Raise Concerns Over Russian Oil Production
Russian oil companies have received a warning from Transneft, the state-owned oil pipeline operator, about potential oil production cuts, according to a Reuters report. This warning comes in the wake of a series of Ukrainian drone attacks targeting key export ports and oil refineries within Russia.
This news has subsequently caused international oil prices to rise, with WTI crude up nearly 1% and Brent crude increasing by 0.8%.
Escalating Ukrainian Attacks on Russian Energy Infrastructure
Since August, Ukraine has intensified its attacks on Russian energy assets, aiming to disrupt Russian military operations and reduce Kremlin revenues after peace talks stalled. Oil and gas revenues are a crucial lifeline for the Russian economy, accounting for between one-third and one-half of total federal revenues over the past decade.
Ukrainian military officials and Russian industry sources have reported that Ukrainian drones have targeted at least 10 oil refineries, at one point reducing Russian refining capacity by nearly a fifth. Additionally, the key Baltic ports of Ust-Luga and Primorsk have been damaged.
Storage Restrictions and Production Cut Warnings
While Russian authorities have not publicly commented on the extent of the damage and its impact on production and exports, industry sources familiar with the matter have revealed to Reuters that Transneft has restricted oil companies' ability to store oil in its pipeline system. The company has also warned that it may have to accept less oil should further infrastructure damage occur.
Analysts suggest that these attacks could force Russia, which accounts for 9% of global oil production, to eventually cut output. Due to the sensitive nature of this information, the sources requested anonymity.
Sanctions vs. Drone Attacks: Which is More Effective?
In the aftermath of the Russia-Ukraine conflict, Western nations have imposed multiple rounds of sanctions on Russia, primarily targeting the oil and gas sectors. However, Moscow has successfully rerouted much of its oil exports to Asia, particularly India and China.
Some analysts, however, argue that Ukrainian drone attacks represent a more effective form of sanction. Last week, Ukrainian drones targeted Primorsk, Russia's largest oil port, for the first time since the start of the conflict in 2022, forcing a temporary shutdown.
Primorsk has a daily export capacity of over 1 million barrels, accounting for over 10% of Russia's total oil production. Ukrainian President Volodymyr Zelenskyy described the attack as causing significant damage, calling the attacks on Russian oil infrastructure the "fastest sanctions to take effect."
Storage Constraints and Production Challenges
Unlike Saudi Arabia, a major producer in OPEC, Russia does not have extensive oil storage capacity. While Primorsk has partially resumed operations, the timeline for full repairs remains unclear.
Additionally, industry sources indicate that Russia has lost some oil export capacity since the drone attack on the Ust-Luga oil terminal in the Baltic Sea in August.
It's worth noting that the OPEC+ alliance, which includes Russia, began increasing production from April after years of output cuts to support oil markets. Under the latest OPEC+ agreement, Russia's oil production quota is set to rise this month from 9.344 million barrels per day (bpd) in August to 9.449 million bpd.
Potential Impact on Russian Oil Output
In a recent report, JP Morgan stated that Russia's ability to increase oil production is now threatened by limited storage capacities. Similarly, Goldman Sachs noted that refinery outages could also hinder production due to crude oil storage congestion resulting from reduced refinery runs. Both financial institutions, however, anticipate only a modest decline in Russian output, given continued demand from Asian buyers for Russian crude.
ZH
