Oil prices undertook a rollercoaster ride ahead of the OPEC + meeting in April this week to discuss how production control is progressing and what their next steps will be over the next few months.
According to the latest reports, Saudi Arabia has said it could start easing voluntary cuts of 1 million bpd, with 250,000 bpd in May and June each, and then ease further.
According to the sources, the cartel as a whole will implement a production reduction of 350 000 bpd in May and June and another 400 000 bpd in July.
The figures, of course, fueled increased oil trading activity with benchmarking measures as new updates emerged. At the time of writing, Brent and West Texas Intermediate were above $ 60 a barrel, up 2 percent from Thursday’s close.
The price increase might have come as a bit of a surprise, but it reflects the fact that the market now knows what OPEC + is planning for the next three months, and that clarity means a semblance of certainty in an extravagant world. But how good is this semblance of certainty?
Take Saudi Arabia, for example, the de facto leader of the oil cartel. The country has been cutting an extra production of 1 million bpd for several months now, in addition to its OPEC + quota, which brings its total production to below 10 million bpd. However, exports did not change proportionally.
Unlike other OPEC members, Saudi Arabia has performed excellently in terms of quota compliance. And yet it’s the oil in February exports according to various data calculations, they only decreased by 194,000-300,000 bpd against the background of a reduction of 1 million bpd in production.
However, this insignificant change in exports had no effect on prices: prices recovered after Saudi Arabia pledged 1 million bpd because traders assumed it would remove 1 million bpd Saudi oil from oversupply world markets would mean. This assumption continued even after the export numbers became clear.
Related Video: Nuclear Fusion: The Unlimited Future But you can do more with exports than using oil from storage to keep it relatively unchanged, even if production changes dramatically. You can also reduce exports to increase prices. This is exactly what Saudi Arabia it did shortly after announcing his decision to reduce another 1 million bpd of production. The kingdom said in January it would reduce shipping to customers in Europe and Asia – the largest market – with some small buyers denying Saudi crude oil for February.
Production figures, however important they may be, are only one of several measures that indicate the balance between supply and demand for a commodity. Export is another measure, and this measure is probably the most important.
Production disruptions and deliberate cuts certainly play a major role in price movements, and the effect of news on Libya, for example, is proof of that. Ultimately, it’s the exports that matter, because neither Libya nor its fellow troubled OPEC member Iran keeps the oil they pumped for ever higher tariffs for themselves.
News that OPEC’s total oil production in February even exceeded 3 million bpd’s self-imposed quotas, up from 2.7 million bpd in January that weighed on oil prices earlier this week. Yet it was the news that Iran could send as much as 1 million bpd to China this month, which Iran’s fellow OPEC members must surely have been more concerned about.
News of rising Iranian production has been circulating for several months now after the government in Biden signaled that it could impose Iranian sanctions if Iran agrees to return to the nuclear deal. These reports weigh on prices, but not on their own: they are often accompanied by reports of rising Iranian oil exports, mostly to China.
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Or take Libya as another example of how much more exports end up being price movements. Reports of rising Libyan oil production were obviously clumsy for benchmarks. Nevertheless, the news about oil export terminal blockades was strongly positive. One could argue that the closing reports on export terminal had a more bullish effect on prices than the bearish effect of production growth.
Either way, in reality, most traders seem to equate production with export. This is perfectly understandable, since most OPEC members export the most oil they produce, so the more they produce, the more they export. But here’s a twist we’ve seen before and have yet to see again. Even if OPEC + agrees to an addition of 350,000 bpd to the total production, individual members can increase their exports by more than that. They will only get it out of their storage tanks, which are still full after the demand crisis in 2020.
So it does not really matter how many barrels per day OPEC + decides to add production from May to July. What matters is how many barrels leave their ports each month. This is the real proof of how strong the demand is, not the production, but the export is important.
By Irina Slave for Oilprice.com
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