The OPEC+ oil alliance countries unexpectedly agreed in early July to increase production from next month by 548,000 barrels per day. The new agreed volume was a third higher than the quotas previously set for May, June and July, of 411,000 barrels per day. Thus, OPEC+ participants refused to reduce production.

Explaining the reasons for the acceleration of oil production, Reuters sources noted that some countries - in particular Kazakhstan, Iraq and Russia - in some places allowed themselves to produce more than agreed, which caused dissatisfaction among other participants. In addition, the OPEC+ cartel seeks to increase its share of the world market.

How effective this strategy will be will become clear by the end of the year. But it is already obvious that participation in the OPEC+ alliance and public support for its policy cannot help Russia remain an influential player in the world oil market and maintain revenues from energy exports, which are the main source of financing the war against Ukraine.

Ukrainian Energy has figured out what is currently happening in the Russian oil industry, how Western sanctions are affecting its situation, and how the US and the EU are going to increase financial pressure on Moscow to accelerate the restoration of peace in Ukraine.

Russian losses

Despite relatively stable production, exports of Russian oil and petroleum products are declining. This is stated in a recent report by the International Energy Agency (IEA), the conclusions of which are cited by Bloomberg. It shows that IEA experts doubt Russia's ability to maintain its production capacity, and therefore predict an acceleration of the decline of the industry.

In particular, despite the high utilization of oil refineries (refineries), Russia’s total exports of oil and petroleum products have already reached a five-year seasonal low. The reduction in shipments is observed throughout most of 2024 and 2025. Seaborne exports of Russian oil have also decreased, and in June this year they reached their lowest level since February. This, according to the IEA, “calls into question Russia’s ability to maintain production capacity.”

The agency’s analysts noted that last month Russian refineries operated at high utilization, despite seasonal repair work. This ensured the needs of the domestic market, but reduced the availability of oil for export. The average price of Russian oil in June was below the Western price threshold of $60 per barrel, although for 10 days it slightly exceeded it.

IEA analysts estimated that in June, Russia's total revenue from oil and petroleum products exports amounted to $13.57 billion, down 14% from a year earlier. At the same time, compared to May, revenues increased by $800 million due to the increase in world prices during the 12-day war between Israel and Iran.

What's next?

The European Union is not giving up hope of agreeing on a reduction in the price ceiling for Russian oil within the framework of the 18th package of sanctions, which Hungary and Slovakia have been blocking for a month. The new proposal is to make the ceiling floating in order to avoid the difficulties associated with the need to agree on its new level each time.

European officials, who have so far failed to agree with all 27 EU countries on the new sanctions package presented in early June, have come up with a new move. Now it is proposed to make the price ceiling variable - that is, that it automatically decreases or increases in line with world oil prices without additional decisions or negotiations. This is supposed to help convince Greece, Cyprus and Malta to agree to a lower ceiling, since it is their companies involved in maritime cargo transportation that are suffering losses from the strengthening of anti-Russian sanctions.

New price limits

The price ceiling for Russian oil has never been changed since December 2022, when it was set at $60 per barrel. Insurance companies, shipping companies and companies from the G7 countries are prohibited from providing services for the transportation of Russian oil if the price exceeds this threshold.

However, Russian companies managed to circumvent this restriction with the help of a “shadow fleet” and insurance from companies from Russia or third countries. Therefore, by the end of 2023, all Russian oil was sold above the price ceiling. And with the decline in world oil prices in 2024, the $60 threshold has lost even its symbolic meaning: according to Reuters, the usual Russian Urals blend has long been traded much lower, and the usually more expensive Far Eastern ESPO grade has also fallen below $60.

In early June, the European Commission proposed, as part of the 18th package of sanctions that was never approved, to lower the ceiling to $45. Now, according to the new proposal, the starting level will be somewhat higher, but it will be floating, Reuters sources report.

Rikard Jozwiak, the editor of Radio Liberty, who is usually well-informed about Brussels affairs, recently noted that the European Commission has almost convinced Greece and Cyprus, leaving only Malta. The main thing is that the consent of the United Kingdom, where insurance companies that provide services for 95% of the world oil market are registered, has long been obtained.

And what about the USA?

A separate question is whether the US will be able to persuade it to lower the ceiling. At the previous G7 meeting, which took place on June 16-17 in Canada, US President Donald Trump refused to support any European sanctions against Russia.

On the one hand, lowering the price ceiling is a rare example of sanctions that can operate without American support. On the other hand, it creates the risk of regulatory confusion: companies in the European Union will work with a limit of $45, in the US - with $60, and in China and India, which have become the main buyers of Russian oil since 2022, there are no price limits at all. This creates ample opportunities for circumventing the sanctions.

But now that Trump is set for a conflict with Russia, Brussels hopes that the US can join in. Moreover, the main "anti-Russian hawk" in the Trump camp - Senator Lindsey Graham - has always supported lowering the ceiling and increasing sanctions pressure on the Putin regime, Reuters notes.

The Last Barrier in the European Union

The EU has one last step to take - to overcome the opposition of Slovakia and its silent ally - Hungary, which are blocking the adoption of the 18th package of sanctions in general.

In exchange for support for the sanctions, Slovak Prime Minister Robert Fico is demanding that the European Commission abandon a legislative initiative that would completely ban imports of Russian gas from 2027. This document, if adopted, will be painful for Slovakia: it will have to buy more expensive liquefied gas instead of Russian pipeline gas, which comes via the South Stream through Turkey and the Balkans. In addition, the country, according to Bloomberg, risks lawsuits from Gazprom due to the terms of a $16-20 billion take-or-pay contract that runs until 2034.

However, the European Commission prefers to set a precedent by imposing anti-Russian measures on gas purchases not as a law on sanctions, which requires unanimous approval by all 27 EU countries (and allows Hungary and Slovakia to blackmail the European Commission), but in the form of a European Council decree, for the adoption of which a qualified majority is sufficient - as reported by "Ukrainian Energy", it can be gathered without the consent of Budapest and Bratislava. According to sources of "Radio Liberty", as of the end of last week, Slovakia has not been convinced.

Sanctions dynamics

The situation surrounding sanctions against Russia is changing very dynamically. But right now, several important things are being decided. First, will the European Commission be able to overcome the increasingly tense confrontation from Hungary and Slovakia. Secondly, will Donald Trump's political pendulum swing towards supporting at least moderate sanctions against Russia - such as lowering the price ceiling on oil.

At the same time, according to the British publication The Times, the US president is already considering a "global oil embargo" to increase pressure on Russia's war economy, which serves Vladimir Putin's aggressive ambitions.

"Trump has recently shown growing irritation with President Putin over Russia's refusal to sit at the negotiating table and its persistent continuation of massive drone and missile strikes on civilian targets in Ukraine. This indicates that the head of the White House is increasingly inclined to support a bipartisan bill being prepared in Congress and providing for a radical strengthening of sanctions restrictions," The Times writes.

This law includes for the first time secondary sanctions against countries that trade with Russia. In particular, it provides for the introduction of 500% import duties for countries that buy oil products or uranium for nuclear power plants from Russia. First of all, they will affect China, India and Turkey, which are currently the largest consumers of Russian oil, oil products and natural gas.

The decline is accelerating

According to the results of June, Russian budget revenues from oil sales fell by 33% year-on-year compared to May - to 415.6 billion rubles. This is almost equal to the indicator of the disastrous May, when the drop was almost 35%, according to Reuters calculations based on data from the Russian Finance Ministry.

In absolute terms, this is the lowest amount since January 2023 - the first month after the European oil embargo came into force. The calculations were based on the average price of Urals oil in May, which also fell to the lowest since May 2023 - $52.08 per barrel. In total, in the first half of 2024, the budget's oil and gas revenues fell by 17%.

In addition to the fall in oil prices, the strengthening of the ruble undermined the Russian budget, writes Bloomberg. In May, the average exchange rate of the US dollar was 80.5 rubles - the best indicator in two years. As a result, exporters' revenues in ruble terms turned out to be lower. "The Bank of Russia recognizes that the unfavorable exchange rate and the high key rate are creating increased pressure on both oil exporters and the state budget. The only relief for the government in this situation was the possibility of reducing subsidies for oil refiners, which compensate them for the difference between domestic and foreign fuel prices. In June, these payments were reduced to the lowest since October 2023 - 34.5 billion, - reports Bloomberg. In addition, in the current difficult conditions, the Russian authorities are considering the possibility of a complete ban on the export of petroleum products, so as not to increase price pressure on the domestic market.

Svitlana Dolinchuk, specially for "Ukrainian Energy"

Tags:Oil