Oil prices rose on a roller coaster this week, ahead of the April OPEC + meeting to discuss how production control is and what the next steps would be in the coming months.
According to the most recent reports, Saudi Arabia said it could start relaxing its voluntary cuts of 1 million bpd, starting with 250,000 bpd in May and June each, and then decreasing further.
The cartel as a whole will implement a reduction in production cut of 350,000 bpd in May and June, and another 400,000 bpd in July, according to sources.
The numbers naturally triggered an increase in commercial oil activity with references to the seesaw as new updates emerged. At the time of writing, both Brent and West Texas Intermediate were above $ 60 a barrel, up 2% from Thursday’s close.
The price increase may have surprised you a little, but it reflects the fact that the market now knows what OPEC + plans for the next three months, and clarity means an appearance of certainty in an excessively uncertain world. But how good is that sure look?
Take Saudi Arabia, for example, the de facto leader of the oil cartel. The country has been cutting another 1 million bpd in production for a few months, in addition to its OPEC + quota, which brought its total production to less than 10 million bpd. Exports, however, have not changed proportionately.
Saudi Arabia performed excellently in terms of quota compliance, unlike other OPEC members. And it’s still February oil exports only about 194,000-300,000 bpd fell against the backdrop of a 1 million bpd cut in production, according to different data calculations.
This negligible change in exports, however, had no influence on prices: prices rebounded after Saudi Arabia made the 1 million bpd pledge because traders assumed that this would mean removing 1 million bpd of Saudi oil from global markets with oversupply. This assumption continued even after the export figures became clear.
Related video: Nuclear fusion: the unlimited future But you can do more with exports than use oil from storage to keep them relatively unchanged, even if production changes dramatically. You can also reduce exports to increase prices. That’s exactly what Saudi Arabia he did soon afterwards, he announced his decision to cut another 1 million bpd of production. The Kingdom said in January that it would reduce shipments to customers in Europe and Asia – its biggest market – with some small buyers denying any Saudi oil for February.
Production rates, however important they may be, are just one of several metrics that indicate the balance between the supply and demand for a commodity. Exports are another metric, and that metric is undoubtedly the most important.
Production interruptions and deliberate reductions certainly have a big role to play in price movements, and the effect of the news on Libya, for example, is evidence of this. Ultimately, however, it is exports that matter, because neither Libya nor its troubled OPEC colleague Iran are keeping to themselves the oil they are pumping at ever higher rates.
News The fact that OPEC’s total oil production exceeded self-imposed quotas by up to 3 million bpd in February, from 2.7 million bpd in January, weighed on oil prices earlier this week. However, it was the News that Iran this month could send up to 1 million barrels a day to China, which must have worried other members of Iran’s OPEC.
News of increased Iranian production has been circulating for a few months, after the Biden government signaled it was open to suspend 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 on the increase in Iranian oil exports, mainly to China.
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Or take Libya as another example of how exports are much more significant in terms of price movements. Reports on the increase in Libya’s oil production have been pessimistic for reference, of course. Still, news about blockages in oil export terminals has been strongly optimistic. It can be argued that the export terminal closure reports had a more optimistic effect on prices than the downward effect of production growth.
In any case, in fact, most traders seem to equate production with exports. This is perfectly understandable, since most OPEC members export most of the oil they produce, so the more they produce, the more they export. But here’s a twist that we saw before and we could see again. Even though OPEC + agrees to add 350,000 bpd to total production, individual members are free to increase their exports by more than that. They will just pull it out of its storage tanks, which are still full after the demand crisis in 2020.
So it doesn’t really matter how many barrels per 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 real proof of how strong the demand is; it doesn’t matter the production, but the exports.
By Irina Slav for Oilprice.com
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