The OPEC deal is turning out to be a failure, but has it led the Saudi’s to abandon the deal? Have they cheated on their numbers? These were the questions that arose on March 14, when reports came in that Saudi Arabia had increased production by 263,000 barrels per day in February over January.
The OPEC "Monthly Oil Market Report" publishes two separate figures. One, the production data directly provided by the member nations. Second, the data collated from six independent secondary sources, mainly consisting of statistical agencies and specialist oil industry publishers.
Both figures have been fairly consistent in the case of Saudi Arabia, with an average gap of 72,000 barrels a day in 2016, with the maximum gap being 102,000 barrels a day.
However, in January of this year, there was a gap of 117,000 barrels a day, when the secondary sources data exceeded the government figures by that amount. In February, it was the other way round—the government data exceeded the secondary sources by 214,000 barrels a day, according to John Kemp, a Reuters market analyst.
This discrepancy confused the markets and led to speculation. Nonetheless, Saudi Arabia was quick to offer a clarification: "The difference between what the market observes as production, and the actual supply levels in any given month, is due to operational factors that are influenced by storage adjustments and other month to month variables," reports CNBC. Related: The Wealthiest Oil & Gas Billionaires In The U.S.
The Saudi statement said that in January, though the production was only 9.748 million barrels a day, the actual supply was 9.99 million barrels a day – made possible by the drawings from storage. In February, though the production had increased to 10.11 million barrels a day, the actual supply was only 9.90 million barrels a day – the excess oil was sent to storage.
During both months, Saudi Arabia kept supply below 10 million barrels a day. However, Saudi Arabia may use the current period to restock its depleting crude stockpile, which fell to 262 million barrels at the end of January 2017, from 329 million barrels in October 2015.
So while actual production may increase, what affects the market is the amount of oil exported. For this reason, the markets should focus on the amount of oil supplied rather than the quantity of oil produced—a fact that Iraq has recently subscribed to.
It is in Saudi Arabia’s best interests for the OPEC deal to continue along at a high rate of compliance, because without the deal, oil would be closer to—or below—$40-barrel levels than $50-barrel levels. At that price, Saudi Aramco will not get a favourable listing or the market capitalization that the Saudi’s are expecting. Aramco’s listing is an important component of the oil-rich Kingdom’s Vision 2030 plan, through which the nation plans to reduce the economy’s dependence on oil.
Other than this, even historically, the Saudi’s have been consistent in their reporting and in fulfilling their part of the deal, and it is unlikely that they will sabotage the deal this time. Related: There Is No Such Thing As Peak Oil Demand
Nevertheless, the same cannot be said for the remaining OPEC members, who have a botched history of cheating, exceeding their quota. Even this time, most of the members and Russia are pumping more than their production quotas allow.
Meanwhile, the markets are focusing on the wrong element of the cuts; their focus should be on the other nations like Iraq, Iran and Russia, which are more likely than Saudi Arabia to cheat. The deal may break, but it will not break due to Saudi overproduction.
By Rakesh Upadhyay for Oilprice.com
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