By Irina Slav
Oil prices went on a rollercoaster ride this week ahead of the April OPEC+ meeting to discuss how production control is going and what their next steps would be over the next few months.
According to the latest reports, Saudi Arabia has said it may start relaxing its voluntary 1-million-bpd cuts, starting with 250,000 bpd in May and June each, and then easing further.
The cartel as a whole will implement a production cut easing of 350,000 bpd in May and June, and another 400,000 bpd in July, according to sources.
The figures naturally sparked increased oil trading activity with benchmarks on the seesaw as new updates emerged. At the time of writing this story, both Brent and West Texas Intermediate were above $60 a barrel, up by 2 percent from Thursday’s close.
The price rise might have come somewhat as a surprise, but it reflects the fact that now the market knows what OPEC+ plans for the next three months, and clarity means a semblance of certainty in an excessively uncertain world. But how good a measure of anything is this semblance of certainty?
Take Saudi Arabia, for example, the de facto leader of the oil cartel. The country has been cutting an additional 1 million bpd in production for a couple of months now, on top of its OPEC+ quota, which has brought its total production to below 10 million bpd. Exports, however, have not changed proportionally.
Saudi Arabia has given a stellar performance in terms of quota compliance, unlike other OPEC members. And yet its February oil exports were only down by some 194,000-300,000 bpd against the background of a 1-million-bpd cut in production, according to different data calculations.
This insignificant change in exports, however, had no bearing on prices: prices rebounded after Saudi Arabia made the 1-million-bpd commitment because traders assumed this would mean the removal of 1 million bpd of Saudi oil from oversupplied global markets. This assumption carried on even after the export numbers became clear.
But there’s more you can do with exports than use oil from storage to keep them relatively unchanged even if production changes dramatically. You can reduce exports to prop up prices, too. This is exactly what Saudi Arabia did soon after it announced its decision to cut an additional 1 million bpd from production. The Kingdom said in January that it would reduce shipments to clients in Europe and Asia—its biggest market—with some small buyers denied any Saudi crude for February.
Production rates, then, important as they may be, are only one of several metrics indicating the balance between supply and demand for a commodity. Exports are another metric, and this metric is arguably the more important one.
Production outages and deliberate reductions certainly have a big part to play in price movements, and the effect of news about Libya, for instance, is evidence of that. Yet it is ultimately exports that matter because neither Libya nor its fellow troubled OPEC member Iran are keeping the oil they have been pumping at increasingly higher rates for themselves.
News that OPEC’s total oil production had exceeded self-imposed quotas by as much as 3 million bpd in February, from 2.7 million bpd in January weighed on oil prices earlier this week. Yet it was the news that Iran could this month send as much as 1 million bpd to China that must have worried Iran’s fellow OPEC members a lot more.
News about rising Iranian production has been circulating for a couple of months now after the Biden administration signaled it was open to lifting Iranian sanctions if Iran agreed to return to the nuclear deal. These reports have weighed on prices but not on their own: they were often accompanied by reports about rising Iranian oil exports, mostly to China.
Or take Libya as another example of how much more significant exports ultimately are for price movements. Reports about rising Libyan oil production have been bearish for benchmarks, of course. Still, news about oil export terminal blockades has been strongly bullish. One might argue the export terminal closure reports have had a more bullish effect on prices than the bearish effect of production growth.
Be all that as it may, in truth, most traders seem to equate production with exports. This is perfectly understandable, seeing 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 have seen before and could yet see again. Even if OPEC+ agrees to a 350,000-bpd addition to total production, individual members are free to boost their exports by more than that. They’ll just take it from their storage tanks, which are still full after the demand crisis in 2020.
So, it doesn’t really matter so much how many barrels per day OPEC+ decides to add to its output from May till July. What matters is how many barrels leave their ports every month. This is the actual proof of how strong demand is, not production but exports matter.