OPEC+ Mid-Month Update: Saudi And Russia Are Serious On Reducing Supplies

I had to do a double-take when I was going through these numbers. This is just a mid-month update, so the figures are likely going to be different. But it’s important to know that if crude exports are this low for the 1st half of the month, the 2nd half will have to be startling higher to make up the delta.

First of all, according to Kpler, the first 15 days of August are showing a dramatic drop in crude exports from OPEC+.

Most of this decline is coming from Russia.

How sustainable is this decline?

There are a few important points we need to figure out first. How much of Russia’s crude export is to buyers following the sanctions and how much of it is not?

In July, China and India accounted for ~2.6 million b/d out of the ~4.5 million b/d. This means that the remaining ~1.9 million b/d will be impacted. And because of the tightness we are seeing in sour crude, the Urals differential to Brent has narrowed substantially.

The price cap was set at $60/bbl, so the decline in crude exports could be the result of prices breaching this cap. In addition, we also know based on the communique that Russia is finally starting to target crude exports. Will volumes finally revert back to the average around ~4.3 million b/d? Quite possibly, and if so, this means structurally lower OPEC+ crude exports going forward.

Saudi

Saudi’s crude export decline this month is following the playbook. We originally thought that Saudi crude exports would fall to the ~5.8 million b/d range following the ~1 million b/d voluntary cut announcement. This looks to be materializing.

With another 1 million b/d set to take place in September, global oil-on-water will continue to trend lower, and if Russia’s crude exports remain below ~4.5 million b/d, then we have the tailwind for much higher oil prices.

Oil-on-Water

Over the ensuing weeks, oil-on-water will lead the charge lower. Assuming the same thing for everything else, Saudi and Russian crude export cuts over the next 45 days will take away 67.5 million bbls from the market.

This will put us where that red dot is on the graph (lower right). As you can see, if the momentum continues, then this will put us at the lowest oil-on-water level over the last 5-years.

This, combined with what we talked about yesterday (strong refining margins), should usher in tighter physical market conditions and higher oil prices.

Economics 101 – Supply & Demand

Don’t fight the Saudis, and in this case, also don’t fight the Russians. Both countries seem very determined to increase oil prices via lower supplies. We are seeing the conviction via the export data. As a result, we should see the oil market further tighten in the weeks to come.

It’s just economics.