Oil prices went on a rollercoaster ride this week ahead of the OPEC + meeting in April to discuss how production control is going and what their next steps would be in the coming months.
According to the latter reportsSaudi Arabia has said it could ease its voluntary cuts of 1 million bpd, starting with 250,000 bpd each in May and June, and then easing further.
According to sources, the cartel as a whole will cut production of 350,000 bpd in May and June, and another 400,000 bpd in July.
The numbers naturally led to increased oil trading activity with benchmarks on the sees as new updates emerged. At the time of writing this story, both Brent and West Texas Intermediate were over $ 60 a barrel, up 2 percent from Thursday’s close.
The price increase may have come as somewhat of a surprise, but it reflects the fact that the market now knows what OPEC + is planning for the next three months, and clarity means a semblance of certainty in an extremely uncertain world. But how good is this appearance of certainty of something?
Take Saudi Arabia, the de facto leader of the oil cartel, for example. The country has been cutting 1 million barrels per day extra into production for a few months, on top of the OPEC + quota, bringing total production below 10 million barrels per day. However, exports have not changed proportionally.
Saudi Arabia has shown an excellent performance in quota compliance, unlike other OPEC members. And yet it is February oil export had fallen by only about 194,000-300,000 bpd against the background of a 1 million bpd cut in production, according to various data calculations.
However, this insignificant change in exports did not affect prices: prices rebounded after Saudi Arabia made the 1 million bpd pledge, as traders assumed it would remove 1 million bpd of Saudi oil from oversupply of the world markets. This assumption continued even after export numbers became apparent.
Related video: Nuclear Fusion: The Unlimited Future But with exports, you can do more than use oil from storage to keep them relatively unchanged, even when production changes drastically. You can also reduce exports to increase prices. This is exactly what Saudi Arabia is did shortly afterwards it announced its decision to cut an additional 1 million barrels per day from production. The Kingdom said in January that it would cut shipments to customers in Europe and Asia – the largest market -, with some small buyers denied any Saudi oil for February.
Production speeds, important as they are, are just one of many measures that indicate a product’s supply and demand balance. Export is another metric, and this metric is perhaps the most important.
Production interruptions and deliberate reductions certainly play a major role in price movements, and the effect of news about Libya, for example, is evidence of that. Still, in the end, it’s exports that matter, as neither Libya nor its fellow troubled OPEC member Iran are keeping to themselves the oil they’ve been pumping at ever-increasing rates.
News that OPEC’s total oil production had exceeded self-imposed quotas by as much as 3 million bpd in February, weighing down from 2.7 million bpd in January on oil prices earlier this week. Still, it was the news that Iran could send as much as 1 million bpd to China this month, that must have made Iran’s OPEC members much more concerned.
News of rising Iranian production has now been circulating for several months after the Biden administration expressed its openness to lifting Iranian sanctions if Iran agreed to return to the nuclear deal. These reports weighed on prices, but not on their own: they were often accompanied by reports of increasing Iranian oil exports, mostly to China.
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Or take Libya as another example of how much more important exports are ultimately to price movements. Reports of rising oil production in Libya were, of course, bearish for benchmarks. Still, the news about oil export blockades is highly optimistic. It could be argued that the reports of export terminal closures have had a more bullish effect on prices than the bearish effect of output growth.
Be that as it may, in reality most traders seem to equate production with exports. This is completely understandable given that most OPEC members export most of the oil they produce, so the more they produce, the more they export. But here’s a twist we’ve seen before that we could see again. Even if OPEC + agrees to add 350,000 bpd to total production, individual members are free to increase their exports by more than that. They just get it from their storage tanks, which will still be full after the demand crisis in 2020.
So it doesn’t really matter how many barrels per day OPEC + decides to add to its output from May to July. It’s about how many barrels leave their ports each month. This is the actual proof of how strong the demand is, not production, but exports are important.
By Irina Slav for Oilprice.com
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