More Reasons for Skepticism Over OPEC+’s ‘Cuts’

Two weeks on from OPEC and its partners’ (aka OPEC+) announcing more voluntary oil production target cuts, crude prices have gone sideways. At $86.63 per barrel on Friday, Brent crude hasn’t exceeded $90 since before Thanksgiving—and hasn’t continued climbing after the initial post-announcement bump, contrary to forecasts. The stabilization doesn’t surprise us. As we wrote at the time, OPEC+ were simply cutting production targets they hadn’t come close to meeting. Last time they did so, output fell by much less than the target, and we saw no basis for presuming a different outcome this time. It will be several weeks before we have official production data to show what the cuts mean for actual output this time. But some recent reports add to our hunch that they are largely meaningless.

First up: Bloomberg reported Monday that Russian seaborne crude exports jumped by 540,000 barrels per day (bpd) last week, reversing about half the prior week’s decline—and making it questionable whether Russia had cut output as much as advertised in March. Not just because shipments were up, but because “the increase came from ports in the west of the country, where the burden of cuts is expected to be felt. The only region where flows fell was the Pacific, from where voyages to Russia’s remaining customers are shortest and export prices are highest.”^[i] That would suggest India, China and Pakistan have bid Russian prices up a bit, tempering demand and creating an opening for new players to buy more deeply discounted Russian crude—keeping Russia’s contribution to global supply higher than expected.

Separate Wall Street Journal reporting suggests this oil is also going to some very unlikely places: Persian Gulf petrostates, including Saudi Arabia and the UAE. One commodity research outfit estimates Saudi is now buying 100,000 bpd from Russia—translating to 36 million barrels per year—while the UAE’s purchases “more than tripled to a record 60 million barrels last year.”^[ii] On the surface, this is a curious move for OPEC’s top and third-largest producers. But peel the onion a bit, and it becomes a shrewd move that helps boost their contributions to global output and further defang the production target cuts.

As the Journal reports, both are using Russian oil largely for domestic consumption. This is basically arbitrage. By purchasing dirt-cheap Russian crude to use at home (Russia’s Urals oil blend averaged less than $50 per barrel in March), they can direct more domestic production to exports, selling at higher prices abroad.^[iii] That keeps global supply pretty firm. And not just for crude. The Gulf states are also buying refined petroleum products, including diesel, which was the subject of a global supply freakout very recently. Like Russian crude, Russian diesel sells at cut-rate prices. The US and Europe can’t buy second-hand Russian diesel from Gulf states due to sanctions, but these nations can use cheap Russian diesel at home while selling more of their output to Western nations. To wit, France and Italy—formerly reliant on Russian diesel—are now buying big from Saudi Arabia.^[iv] Abundant, cheap Russian oil and oil products may also potentially reduce the amount spent on Gulf states’ fuel subsidies.

Also worth noting: All of this seaborne trade is below the EU and G-7’s price cap on Russian oil, and it is happening outside the Western system of trade financing and insurance. The cap, supposedly, was going to curtail Russia’s ability to ship by sea by making it too uneconomical and uninsurable. But clearly, motivated parties have found workarounds, and Russia continues boosting global fuel supply. This doesn’t surprise us either, as the price cap seemed to have enough deliberate loopholes to ensure soaring oil prices didn’t reignite inflation in the developed world. Now we are getting more real-world confirmation of its symbolism.

We don’t think any of this is a huge global economic driver. But sentiment toward oil and inflation is still quite touchy, likely giving stable global oil production more bullish surprise power than it might otherwise have. It may not be a swing factor for stocks, but it probably adds modest tailwinds to a trip up the wall of worry.