OPEC Oil Supply Lost in Fog of Data

 

OPEC agreements have been specified in terms of output rather than exports since the first allocations were agreed in March 1982 (“Annual Statistical Bulletin”, OPEC, 2017).

 

Quotas, as the production allocations are informally known, apply to crude oil but not to condensates or other natural gas liquids.

 

The system originally made sense but now appears increasingly outdated because of the rising production of natural gas liquids and the growing oil consumption within OPEC countries themselves.

 

Between 1980 and 2016, OPEC’s crude production increased by 31 percent from 25.4 million barrels per day to 33.3 million bpd.

 

But OPEC’s output of natural gas liquids sextupled from 1.0 million bpd to 5.8 million bpd over the same period.

 

And OPEC’s internal oil consumption more than tripled from 2.6 million bpd in 1980 to 9.0 million bpd in 2016.

 

In fact, OPEC’s own members have reported some of the fastest growth in oil consumption over the last four decades owing to population expansion and increasing prosperity.

 

OPEC’s share of world oil demand has climbed from just 1.8 percent in 1973 and 4.1 percent in 1980 to peak at 9.9 percent in 2015 before edging down to 9.5 percent in 2016.

 

OPEC’s internal demand has risen from 18 percent of its crude oil production in 1982 to as much as 28 percent in 2016.

 

At the same time, some OPEC members have invested heavily in refineries and petrochemical plants to capture more value-added from their exports.

 

OPEC’s refining capacity has grown from 5.3 million bpd in 1980 to 11.8 million bpd in 2016, according to the organisation’s data.

 

The result of these changes is that crude production is less and less relevant to the volume and composition of the crude and refined products that OPEC exports to the rest of the world.

 

Exports, net of any imports, rather than crude production, are what matters for the world supply-demand balance and global oil inventories.

 

There are a range of other problems when it comes to analysing OPEC production data.

 

OPEC’s internal consumption has a strong seasonal element. Saudi Arabia and Iraq burn large volumes of crude and fuel oil in the summer to meet electricity and air-conditioning demand.

 

So the same level of wellhead production can be associated with very different levels of exports and volumes of oil supplied to the market depending on the time of year.

 

Conversely, the same level of exports can be associated with very different levels of output, depending on refinery intake and the amount of crude and fuel oil burned in domestic power plants.

 

Saudi Arabia has been building gas-fired power plants to reduce combustion of crude and fuel oil for electricity generation.

 

While the policy is sensible, it has led to a significant shift in the relationship between production and exports and become an additional source of uncertainty.

 

Adding to the confusion, wellhead production is known only to the countries concerned, cannot be independently verified and is reported with a long delay.

 

A host of commercial tanker-tracking services have been launched in response, estimating export volumes in real time based on information broadcast by shipboard automatic identification systems (AIS).

 

Like other commercial ships, oil tankers must be fitted with AIS equipment that continuously broadcasts critical safety data, including the vessel’s position, speed, heading, destination, cargo, dimensions and draught.

 

Cross-checked with data from other sources, including port authorities and bills of lading, the AIS data can be modelled to estimate the volume of crude and other products being exported.

 

Thomson Reuters has its own ship-tracking service but oil flows are also estimated by standalone cargo-tracking companies including Kpler.

 

As with any model, the estimates are sensitive to the assumptions made to convert the AIS data into export volumes.

 

But AIS data is available in real time, so many analysts rely on export estimates rather than wait for government production figures to track the volume of oil OPEC is supplying.

 

The result has been confusion as analysts and traders struggle to reconcile government data on production and exports with commercial estimates of exports based on ship tracking.

 

Ultimately, analysts and traders care about the volume and composition of crude and refined products being supplied to the market by OPEC members, rather than the amount produced at the wellhead.

 

But OPEC’s current agreement focuses on wellhead output, which is neither verifiable nor particularly relevant, and leaves the market trying to figure out how it will translate into oil supply and inventories.