Press release

Russian crude output rebounds strongly, but hard times lie ahead

Russia has so far demonstrated high resilience to the unprecedented pressure imposed by Europe and the US – but the worst is yet to come, according Rystad Energy research. While Russian crude output is expected to remain high for the remainder of the Northern Hemisphere summer it is expected to decline again due to a countrywide economic downturn and a drop in refinery runs and crude exports, according to Rystad Energy research.

The country has actively ramped up oil production in June and July following a huge 1 million barrels per day (bpd) drop in April, with the July total almost recovering to the level seen before the start of Russia’s conflict with Ukraine in late February. This outstanding growth was primarily driven by higher refinery runs while crude exports shrank after reaching record levels that exceeded 5 million bpd in April and May. Rystad Energy’s new estimate for average 2022 Russian crude production is 9.6 million bpd – up by 200,000 bpd from our June outlook – but the impending European Union (EU) embargo on imports coupled with domestic economic challenges mean major hurdles lie ahead for Russia.

Russian crude exports have been on a downward trajectory this summer, falling to 4.6 million bpd in June and 4.2 million bpd in July, according to Rystad Energy estimates. In June, both Europe and Asia reduced purchases of Russian crude, while July exports to Europe increased slightly as the region prepares for an oil embargo set to take effect in December. At the same time, exports to Asia continued to drop, which could be explained by discounts proposed for Russian blends being less generous than before. The exact reason is hard to determine as trading operations with Russian crude dropped off the radar after February, making it difficult to track the spreads between Russian blends and benchmarks. Price reporting services have been reporting various numbers: Argus, had the Urals discount to Brent in July reduced to $15 per barrel, while rivals Platts and Reuters did not change their estimates of between $30 and $40 per barrel.  

Russia’s upstream sector has rebounded but this resilience is short term. Domestic consumption has helped fill the gap during the peak demand season, but overseas demand for Russian blends has dipped spelling trouble further ahead. The upcoming EU embargo remains an unknown factor, when and where it will impact is not yet clear, but it will hasten the decline expected this autumn.

Daria Melnik, senior analyst, Rystad Energy.

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Domestic market picks up the slack

Some crude volumes were redirected from exports to the domestic market for refining. Refinery runs demonstrated an outstanding month-over-month growth in June and July of 390,000 bpd and 330,000 bpd, respectively, and reached 5.8 million bpd in July versus 5 million bpd in May. Higher margins coupled with seasonal demand growth inside the country were the main drivers. Domestic oil prices depend directly on realized Urals prices in the global market, so huge discounts made refinery feedstock much cheaper. As domestic refineries increased their production to take advantage of cheaper barrels, local demand for gasoline and other products increased, which more than offset the drop in oil product prices. At the same time, with some borders closed and fewer flights to choose from, more Russians selected alternative vacation options, such as domestic road trips, creating additional demand to traditionally higher seasonal consumption. Apart from local markets, Russian refiners supplied more oil products to the Middle East and Africa.

Rystad Energy expects Russian crude output to stay high for the rest of the summer, supported by seasonally high oil product demand. The second half of the year will, however, be challenging for oil producers as the effect of the EU oil embargo will gain steam, while the seasonal drop in refinery runs will be aggravated by an expected overall economic downturn in the country.

EU embargo: how and where the storm will land not known, but it is looming  

The EU embargo on Russian crude is set to come in force by the end of this year, but it is not possible to ban 90% of crude imports coming from Russia immediately, meaning that the phase-out will be gradual during 2022. At the same time, Rystad Energy sees the possibility of lags in embargo implementation as well as low compliance during the first months of 2023 due to economic woes and the logistics involved in replacing so many barrels. EU imports of Russian crude are expected to dwindle to just 600,000 bpd by December 2022 – a nearly 2.5 million bpd drop from the 3 million bpd before Russia-Ukraine conflict.

Rystad Energy still expects that Russia will be able to redirect a significant portion of crude volumes – or 75% in our base case – to Asia and other markets. It was recently reported that the UK – where the world’s leading insurance market, Lloyd’s of London, is located – decided to postpone the ban on providing Russian vessels with marine insurance, thereby giving Russian producers additional time to better prepare for new sanctions. The new date for the ban has not yet been disclosed. The availability of rerouting options means that the 2.5 million bpd drop in Russian exports to the EU will not have a one-to-one impact on Russian upstream supply – Russian export losses are estimated at only 500,000 bpd to 600,000 bpd by December 2022.

Decline set to start this autumn

As oil product demand is set to pass its peak, refinery runs are expected to start declining in the autumn. However, Rystad Energy sees a more pronounced drop in refinery runs than in quiet years as a significant fall in economic activity is expected in the third and fourth quarters of 2022 since the effect of financial and sectoral sanctions will begin to be felt. The Central Bank of Russia expects the national economy to collapse by between 7.5% and 8% year-over-year in the third quarter and by between 10% and 11% in the fourth quarter of this year. Lower economic activity will put pressure on refinery runs, which are expected to drop to 5.2 million bpd by December, or by 700,000 bpd as compared to December last year. 

Russia will have to cope with a national economic crisis as well as source new markets for its oil and oil products when the EU embargo comes into force. After the summer ramp-up, crude production is expected to fall again by 1.1 million bpd, but further recovery will be more challenging and will take more time. A major uncertainty in the production forecast is cast by the widely reported initiative to impose a price cap on Russian crude. It is still unclear how this price cap would work, what the level would be, and which countries would support this idea. Even if Russian companies agree to sell crude at the fixed price, a political decision could be made to forbid any crude imports to countries taking part in the initiative. In this case, crude production may drop much more significantly than currently expected. Rystad Energy awaits more details on this initiative to be able to estimate Russian crude output in this price cap scenario.


Daria Melnik
Senior Analyst Upstream
Phone: +47 24 00 42 00

Victor Ponsford
Media Relations Manager
Phone: +47 94 97 49 77

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