Saudis Insist Exports, Not Production, is Key to Market Rebalance

Friday March 24, 2017

Although the cutback initiative of the Organization of the Petroleum Exporting Countries (OPEC) focuses on compliance with production rather than exports, Saudi Arabia, which is maintaining its informal role as goodwill ambassador in the face of mounting criticism over the efficacy of the cutbacks, says export rates are the true key to rebalancing the market.

The distinction accompanies the Saudis' response to Russia reducing its oil production more slowly than anticipated, a response that can best be described as laissez-faire - and for the sake of not further scaring an already jittery market, according to Daniela Corsini, a Milan-based analyst for Intesa Sanpaolo SpA: "Confidence in the OPEC/non-OPEC deal is the most important tool to protect crude prices."

A Saudi-based industry source told Reuters that while the kingdom's production could fluctuate slightly from month to month, supply will remain stable at around 10 million barrels per day (bpd), in line with its OPEC cutback quota: "What we are watching closely is the supply: Saudi Arabia will not supply the market more than 10 million bpd,"

The Saudis are the only OPEC holder of large spare capacity used in case of possible global supply shortages, so while production and inventories within the country can swell, in theory, the global glut is not affected because the crude is not exported to market.

Reuters notes that the different ways of crunching crude numbers has led to considerable confusion in the media, an example being when the Saudis recently told OPEC its production increased to 10.011 million bpd in February from 9.748 million bpd in January, only to subsequently state that its January supply was higher than output at 9.99 million bpd - "meaning it drew oil from storage, while in February supply stood below output at 9.90 million bpd, meaning it moved oil into storage."

Reuters adds, "So when the market widely praised Riyadh in January for producing below its output target, the kingdom never said it was actually supplying more crude."

But the different ways of viewing reduction notwithstanding, the amount of oil coming to the market is still rising, says Olivier Jakob, managing director of Petromatrix: "With a low level of reduction in Saudi crude oil exports versus a year ago and the increase from Iran, the Gulf region was exporting about 250,000 bpd more crude oil than a year ago.

"This has not allowed much of a rebalancing in the first quarter."

It's also questionable the degree to which the market can be assuaged by the Saudis soft-pedaling the disclosure that Russia is still not cutting back as quickly as the kingdom would like: Bloomberg reports that it "publicly prodded" the Kremlin to speed up its full 300,000 bpd production cut by the end of this month, only to have Alexander Novak, energy minister for the former Soviet Union, declare that it won't meet this target until the end of April.

Khalid Al-Falih, energy minister for the Saudis, said the Russian cuts are "slower than what I'd like, but I think we are patient and we will see where we are in May and take it from there."

To which Corsini remarked, "Saudi Arabia will not openly criticize poor Russian compliance as it's not in their interest to scare market participants."

Earlier this month at CERAWeek in Houston, the Saudis and Russia presented a united front in a bid to bolster confidence in OPEC's cutback agreement, only to have the rug pulled out from under them by Iraq boasting that it will be able to produce 5 million bpd of crude by the second half of this year.