This week, oil prices skyrocketed ahead of the April OPEC + meeting to discuss how production control is going and what its next steps would be in the coming months.
According to the most recent reports, Saudi Arabia has said it may begin to relax its voluntary cuts of one million bpd, starting at 250,000 bpd in May and June each, and then shrink further.
The cartel as a whole will implement a reduction in production of 350,000 bpd in May and June and another 400,000 bpd in July, according to sources.
The figures naturally led to an increase in oil trading activity, with declining references, as new updates emerged. At the time of writing, Brent and West Texas Intermediate were above $ 60 a barrel, up 2% from Thursday’s close.
The rise in prices may 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 the clarity means an appearance of certainty in an overly uncertain world. But to what extent is this measure of certainty good?
Take Saudi Arabia, for example, the de facto leader of the oil cartel. The country has reduced production by an additional 1 million barrels per day for a couple of months, above its OPEC + share, which has brought its total production to less than 10 million barrels. per day. However, exports 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 they only dropped about 194,000-300,000 bpd in the context of a reduction in production of one million bpd, according to different data calculations.
This insignificant change in exports, however, had no influence on prices: prices rose after Saudi Arabia pledged one million bpd because traders assumed this would mean the elimination of one million. of Saudi oil bpd from supercharged world markets. This assumption was continued even after export figures became clear.
Related video: Nuclear fusion: the unlimited future But there are more things you can do with exports than use storage oil to keep them relatively unchanged, even if production changes drastically. You can also reduce exports to increase prices. This is exactly what Saudi Arabia does did shortly afterwards he announced his decision to cut one million more barrels of production. The Kingdom said in January it would reduce shipments to customers in Europe and Asia, its largest market, with some small buyers denying any Saudi crude for February.
Production rates, however important, are just one of several metrics that indicate the balance between supply and demand for a commodity. Exports are another metric and without a doubt this metric is the most important.
Deliberate production cuts and reductions certainly play a big role in price movements, and the effect of the news on Libya, for example, is proof of that. Still, it is exports that matter, because neither Libya nor its troubled OPEC member, Iran, keep the oil they have been pumping at ever-higher rates for them.
News that OPEC’s total oil production had surpassed self-imposed quotas of up to 3 million bpd in February, from 2.7 million bpd in January, which weighed on oil prices earlier this week. Still, it was the News that Iran could send up to a million barrels a day to China this month, which must have worried Iran’s OPEC colleagues much more.
News of an increase in Iranian production has been circulating for a couple of months after the Biden administration noted that 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 themselves: they were often accompanied by reports of rising Iranian oil exports, mainly to China.
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Or, take Libya as one more example of how much more important exports are ultimately for price movements. Of course, reports of rising oil production in Libya have been bearish for benchmarks. However, news of oil export terminal blockades has been strongly bullish. It could be argued that reports of export terminal closures have had a more bullish effect on prices than the bearish effect of output growth.
Either way, 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 could still see again. Even if OPEC + accepts an addition of 350,000 bpd to total production, individual members can increase their exports more than that. They will only take it from the storage tanks, which are still full after the 2020 demand crisis.
Therefore, it does not matter how many barrels a day OPEC + decides to add to its production from May to July. The important thing is how many barrels come out of their ports each month. This is the real proof of the importance of demand, no matter production, but exports.
By Irina Slav for Oilprice.com
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