(Public) Asking For A Friend, Does The OPEC+ Production Cut Really Matter?

OPEC+ announced that the voluntary production cuts will be extended to the end of June. But a more important question I think everyone should ask is: does the production cut even matter?

Yes, I understand production does not equate to exports. Domestic demand has a material fluctuation on how much OPEC+ can export on a month-to-month basis. Seasonality also plays a role along with maintenance, but from the market's perspective, without the Saudis, is this even a production cut?

If you look closely at the data, the only country really cutting production is Saudi.

Y-o-y, Saudi crude exports are ~500k b/d below. At ~9 million b/d of production, we think the Saudi cut is real. As for everyone else, well, it's not showing up in crude exports.

The biggest offender of all of this is Russia, once again. Looking at Russian crude exports, it's clear that weather and maintenance impacted crude exports in February. A similar drop was seen last year, so the new announcement that they will cut production by ~471k b/d to the end of June just seems like more posturing.

Since the voluntary production cuts have been announced, Russia has effectively not reduced supplies to the rest of the world. No matter how you slice and dice the production does not equal to export argument, the reality is that the availability of crude from Russia to the rest of the world is higher, not lower.

And for the market, that's the only truth that matters.

OPEC+ Math

What we just wrote above creates a funny/interesting dilemma for the oil market. If it is, in fact, true that everyone else other than the Saudis is not cutting, then the oil market is significantly tighter than what's on paper.

We would peg Saudi's production cut of ~1 million b/d as real, so this cut is filtering through the market today. As for everyone else, I think it's only marginally lower at around ~200k b/d. This means the total effective cut is only 1.20 million b/d versus headline figures of 2+ million b/d.

Now it's worth noting that Kuwait's crude exports are lower by ~120k b/d since December, and UAE's Ruwais refinery (~600k b/d capacity) is undergoing maintenance in Q1. UAE is seeing higher crude exports YTD versus December, but this could quickly decrease in Q2.

For Q2, we think Saudi, UAE, and Kuwait could increase that deficit versus Q4 to ~1.35 million b/d, which would be meaningful. As for everyone else, I don't think the cut is real.

Implications Going Forward

In essence, this is just a production cut from the Saudis. With the oil market already materially tighter than consensus expectations coming into 2024, there are important implications for the rest of the year.

1. Headline OPEC+ production cut figures will be ignored by the market. All eyes will be on Saudi, UAE, and Kuwait to estimate balances.

2. Crude tightness will constantly fight against refineries. We firmly believe that the playbook for 2024 is for refining margins to lead crude prices. When refining margins stall, crude will stall. When refining margins rally, crude will rally, and vice versa.

3. Global oil supplies will not surprise to the upside in 2024, so the Saudis are firmly in control.

4. A surprise in demand is the only scenario where oil prices can spike, and even then, the US and China can use SPR to tame prices.

In conclusion, the lack of a production cut outside of Saudi, UAE, and Kuwait is good news for the oil market. It's not as "propped" up as some of the oil bears believe. But this still does not take away the fact that the oil market will likely be rangebound this year. I think with everything I laid out above, the Saudis are going to be firmly in control of balances this year. So far, the market is surprising to the upside (tighter than expected), which should open up room for the Saudis to unwind their voluntary cuts in H2 2024.

Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.