Oil prices kicked off in a Russian race this week ahead of the April OPEC + meeting to discuss how production control is being conducted and what their next steps would be in the next few months.
According to the latest rEPORTS, Saudi Arabia said it could begin easing its voluntary cuts of 1 million bpd, starting at 250,000 bpd in May and June each, and then reduce further.
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, according to sources.
The figures naturally triggered an increase in oil trading activity, with tipping benchmarks, as new updates emerged. At the time of writing, both Brent and West Texas Intermediate were over $ 60 a barrel, up 2% from Thursday’s close.
The rise in prices may come as a bit of a surprise, but it reflects the fact that the market now knows what OPEC + plans are for the next three months, and clarity means an appearance of certainty in an overly uncertain world. But how good is a measure of something this appearance of certainty?
Take Saudi Arabia, for example, the de facto leader of the oil cartel. The country has reduced another million bpd in production for several months, in addition to its OPEC + share, which has brought its total production below 10 million bpd. However, exports did not change proportionately.
Saudi Arabia has performed stellarly in terms of quota compliance, unlike other OPEC members. And yet the oil of February exports they decreased by only about 194,000-300,000 bpd amid reduced production by 1 million bpd, according to various data calculations.
However, this insignificant change in exports had no effect on prices: prices returned after Saudi Arabia pledged 1 million bpd, as traders assumed that this would mean removing 1 million bpd of Saudi oil from overfed global markets. This assumption continued even after export numbers became clear.
Associated video: Nuclear fusion: the unlimited future But you can do more with exports than use storage oil to keep them relatively unchanged, even if production changes dramatically. You can also reduce exports to support prices. This is exactly what Saudi Arabia is made shortly after announcing its decision to cut another 1 million bpd of production. The kingdom said in January it would reduce shipments to customers in Europe and Asia – its largest market – and some small buyers refused any crude from Saudi Arabia for February.
So production rates, no matter how important, are just one of several metrics that indicate the balance between supply and demand for a commodity. Exports are another value, and this value is probably the most important.
Deliberate production disruptions and reductions certainly play an important role in price movements, and the effect of the news about Libya, for example, is proof of this. However, the importance is ultimately of exports, because neither Libya nor its colleagues, OPEC members, Iran, keep the oil they have pumped at an ever-increasing rate for themselves.
News OPEC’s total oil production exceeded self-imposed quotas by up to 3 million bpd in February from 2.7 million bpd in January, weighing on oil prices earlier this week. However, it was news that Iran could send up to a million bpd to China this month, which must have worried its Iranian OPEC colleagues much more.
News of an increase in Iranian production has been circulating for several months, after the Biden administration signaled that it is open to lifting Iranian sanctions if Iran agrees to return to the nuclear deal. These reports have influenced prices, but not alone: they have often been accompanied by reports of rising Iranian oil exports, especially to China.
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Or take Libya as another example of how significant exports are in the end for price movements. Of course, reports of rising Libyan oil production were negative for benchmarks. However, news of oil export terminal blockages has been strong. It could be argued that the reports of the closure of export terminals had a stronger effect on prices than the downward effect of the increase in production.
However, in reality, most traders seem to equate production with exports. This is perfectly understandable, as 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 and we’ve been able to 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 will only take it from their storage tanks, which are still full after the 2020 demand crisis.
So it doesn’t matter so much how many barrels a day OPEC + decides to add to its production from May to July. What matters is how many barrels leave their ports each month. This is the real proof of how strong demand is, not production, but exports.
By Irina Slav for Oilprice.com
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