Oil prices witnessed a significant increase of approximately 2.5% on Monday following OPEC and its allies’ decision to extend production cuts through 2024, effectively reducing the oil market’s daily supply by 3.5 million barrels.
Adding to the positive news, Saudi Arabia announced a further reduction of one million barrels in July, which would bring their daily production down to nine million barrels. This level hasn’t been seen since 2013, making it even more surprising that oil prices remain stagnant in the mid-$70s range. Analysts have projected prices well above $80, but investors’ lack of trust in the oil market’s data and overall stability is impeding their willingness to invest.
The prevailing skepticism arises from the disparity between reported oil supply and demand figures and the actual physical market conditions. Official statistics released by governments and other authoritative entities often diverge from the reality, resulting in significant revisions in subsequent months. The presence of numerous “shadow tankers” transporting more Russian oil than officially reported exemplifies this issue. Reports on shipping tanker data suggest that Russia’s pledged production cut of 500,000 barrels per day may not have materialized.
OPEC’s estimates have also faced scrutiny, prompting the organization to tacitly acknowledge the discrepancy. For example, OPEC reduced production quotas for four African nations that were already falling short of their quotas, essentially making the cut nominal rather than substantive.
RBC Capital Markets analyst Michael Tran aptly noted, “The physical market is undefeated.” He contends that the actual oil market reflects a looser supply-demand balance compared to what the official data suggests. This misalignment of information contributes to a lack of confidence among traders and investors, stifling bullish sentiments towards oil commodities and related stocks. The SPDR S&P Oil & Gas Exploration & Production exchange-traded fund (XOP) has experienced a 4.6% decline this year.
This disconnect and subsequent lack of trust have hindered analysis, risk deployment, and liquidity, leading to suboptimal positioning within the analyst and investor communities, as Tran observed.
The issue of inaccurate statistics is not exclusive to OPEC; U.S. data has also contributed to confusion in recent months. The Energy Information Administration (EIA), responsible for releasing U.S. government statistics, has made significant adjustments to its estimates. Officials have cited the increasing complexity of data gathering due to heightened crude oil and oil product exports. The EIA has expressed intentions to address these concerns and rectify the situation.
Given the prevailing trust issues, investors are likely to remain cautious before fully embracing the narrative of a supply shortfall that some analysts anticipate will drive oil prices higher. Meanwhile, one country that instills confidence through its official records is the U.A.E., which is set to increase its production by 200,000 barrels per day under the latest OPEC agreement. In this case, it is highly probable that the promised increase will indeed materialize.