Clyde Russell, Reuters

If it were possible to boil the crude oil market down to just one determining factor for the coming months, it would be this: What will Saudi Arabia actually do?

The Saudis appear to have emerged as the winners from last week’s OPEC meeting and the subsequent talks between OPEC and its allies in the deal to restrict output.

The outcome of the meetings would seem to indicate that crude oil supply should rise by as much as 1 million barrels per day (MMbbl/d). That’s based on the assumption that OPEC and allies will return to 100% compliance with the November 2016 cut of 1.8 MMbbl/d from a current situation of over-compliance.

However, the reality on the ground is that many OPEC countries lack the ability to pump their full quotas. Saudi Arabia is the only producer that can ramp out output significantly within a short period of time.

The market consensus after the OPEC meeting in Vienna on June 22 and the talks with non-OPEC allies the following day was that the agreements reached wouldn’t actually result in an extra 1 MMbbl/d reaching global markets.

While there is some debate on the likely increase in supply, the upper end of the range is about 600,000 bbl/d. The question is whether this would be enough to prevent prices from rallying again.

Given that Saudi Arabia, the world’s largest crude exporter, must provide the lion’s share of any increase in output, watching its export numbers and price signals in the coming months will be key. In fact, the Saudis already are supplying more crude, according to vessel-tracking and port data compiled by Thomson Reuters Oil Research and Forecasts.

Saudi seaborne crude exports were 7.06 MMbbl/d in May, the most in a year, the data shows.

Prior to the November 2016 agreement, Saudi Arabia was regularly exporting more than 7 MMbbl/d. But it’s also worth noting that only in two months, January and February in 2016, did the kingdom ship more than 7.6 MMbbl/d. What this shows is that the Saudis definitely have the scope to export more crude, but boosting output above 7.6 MMbbl/d on a sustained basis isn’t something they have done in recent years.

Rising Refined Fuel Shipments

The Saudis are on track to export more than 7 MMbbl/d in June, with Thomson Reuters data estimating seaborne shipments of 7.1 MMbbl/d.

But it’s interesting to note that the Saudis have been somewhat vague when it comes to saying exactly how much more they will produce.

Saudi Energy Minister Khalid al-Falih said after last week’s meetings that the kingdom’s state-controlled oil company will increase output by hundreds of thousands of barrels, with precise figures to be decided later.

There is also some confusion over whether Saudi Arabia will be permitted, in terms of the OPEC/non-OPEC agreement, to over-produce its quota to make up for shortfalls from other members, such as Venezuela and Libya, currently unable to pump more.

Iranian Oil Minister Bijan Zanganeh said Saudi Arabia wouldn’t be allowed to pump more on behalf of Venezuela, meaning the kingdom “can increase its production by less than 100,000 [bbl/d].”

With no certainty on exactly who can produce what, it becomes more important than ever to monitor crude oil flows in coming months, and perhaps less important to hang on every word uttered by the various parties to the OPEC/non-OPEC agreement.

Another factor often bypassed in the discussion is exports of refined fuels.

Saudi Arabia’s exports of gasoline were about 350,000 bbl/d in the first four months of this year, according to the Joint Organisations Data Initiative (JODI). That’s up by about 100,000 bbl/d from the 2017 average.

Saudi shipments of gasoil averaged just under 800,000 bbl/d in the January to April period, about 200,000 bbl/d more than for 2017.

For all oil products, the JODI data show that Saudi Arabia’s exports averaged 1.83 MMbbl/d in the first four months of 2018, up 32% from the 1.39 MMbbl/d recorded in the same period last year.

What this shows is that Saudi Arabia is already boosting exports to global markets, but in the form of refined products rather than crude.

That brings us back to the burning question for oil markets: How much more can, or will, the Saudis add to the global supply of both crude and refined products?

There is certainly a risk in relying on the kingdom to virtually single-handedly balance supply and demand, thereby keeping prices in the sweet spot of about $70 to $80 per barrel, which seems to be high enough to prevent fiscal problems in most producers, but low enough to prevent demand destruction.