The main catalyst that pushed the price of oil from a 13 year low in early February, when crude briefly traded in the mid-$20 to well over 50% higher less than one month later in one of the world's most furious short squeezes, was the recurring infatuation with the fabricated narrative that OPEC would if not cut production then, then at least freeze it.
We mocked this, as recently as one month ago, when we wrote "About That "Oil Freeze": Russian Crude Production Sets New Post-Soviet Record In February" an article which was self-explanatory:
... according to calculations by Bloomberg's Julian Lee, Russian crude and condensate production just set new post-Soviet daily record of 10.92m bbl yesterday.
He notes that the monthly estimate is based on daily data from Energy Ministry’s CDU-TEK for 1st 25 days, and applies the average rate over last week for final 4 days. And since this compares with a revised 10.91m b/d for January, it means that Russia took the production "freeze" seriously: by freezing at a new record high level of production.
What was even more entertaining, is that the so-called "production freeze" came at a time when both Saudi Arabia and Russia, the two most important oil exporters in the world, were already producing crude at the highest recorded level - they couldn't produce more even if they wanted to.
Then this so-called "freeze" took on a truly bizarre twist one week ago when we first heard what we thought at the time was a cruel rumor, namely that while OPEC production may indeed be frozen, there is absolutely no limitation on exports. In fact, the lower the domestic demand for oil, the greater (and in the case of Saudi Arabia and Russia, even more record) the exports would be:
So OPEC is having oil storage problems too which is why it will limit production but will export as much oil as possible
— zerohedge (@zerohedge) March 16, 2016
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Moments ago we learned that this was not in fact a "cruel rumor" but was the whole truth, when Reuters reported that "Russia will export more oil to Europe in April than it has in any month since 2013 - despite Moscow's plan to sign a global agreement on freezing production in a bid to lift the price of crude."
Asked what would be covered by the agreement, Russian Energy Minister Alexander Novak told reporters: "The discussion is only about freezing production. And not exports."
The high level of Russian oil exports next month was confirmed to Reuters on Wednesday by export pipeline monopoly Transneft. According to the company, Russia is set to export 7 million tonnes from Baltic Sea ports in April, the largest volume since October 2013. That marks a 9 percent increase on the 6.41 million tonnes planned for export in March.
Oops.
At this point Reuters confirms what we have said all along: that the "production freeze" is just a farce, designed to jawbone the price of oil higher when in reality not only will it not limit supply but may very well boost it as exports increase to offset declining domestic demand (which is to be expected among the depressed oil-exporting countries):
The fact Russian exports are rising illustrates how hard it will be to enforce the deal, due to be finalised on April 17 in Qatar, and shows the potential for countries to use loopholes to keep exporting crude, blunting the intended impact on prices.
Russia can raise exports while keeping production flat by re-routing some oil away from refineries and into exports. Moscow says the freeze covers production, not sales abroad.
The joke is now only on the algos: as we noted yesterday, even the IEA admits the production freeze "deal may be meaningless."
It gets even better: Iran and Libya have said they will not participate, at least for now, and they plan to raise production. It gets better: Nigeria, the top oil producer in Africa, has said it expects oil exporters to agree a supply freeze in Doha next month but that it plans to boost its own output.
In other words, not only is there not a deal, but this is merely the latest validation that OPEC no longer can enforce anything, and has effectively lost its cartel status.
Reuters confirms what we said in a tweet one week ago: "the increase in Russian exports is mainly because of planned maintenance at refineries that reduced their capacity to process crude. It also reflects Russia's economic slump, which has reduced domestic demand for refined products."
But another factor, according to one trader, is a desire by Russian producers to protect their share of the crude oil market in Europe, where Russia's traditional dominance is under threat from newly arriving Saudi supplies.
"Of course, no one said those markets belong to Mother Russia. This is purely commercial trade," said the trader, who spoke on condition of anonymity because he is not authorised to talk to the media. "But a marketplace is a marketplace, no one is going to give it up."
But what is most laughable, is that in addition to the 30+ million in offshore barrels that will soon have to be unloaded on land as the contango no longer makes offshore storage economical (as described yesterday) the global supply glut is about to get even worse thanks to the likes of Russia, who are about to unleash an unprecedented export flood on the rest of the world.
According to Reuters calculations based on Energy Ministry data, Russia will have as much as 4.3 million tonnes of idle refining capacity next month, more than twice the 1.9 million tonnes unused in March. Russian refineries traditionally have the largest offline capacity in April, as companies scramble to finish maintenance before consumption of oil products peaks in summer.
This forces producers to divert crude towards exports, because there is nowhere to store the oil that otherwise would have gone to refineries.
This means that as soon as next month, there will be an extra 2.4 million tonnes of extra oil being exported by Russia; how this oil will be sold to some willing end buyer without crushing oil prices in what is already a 3 million barrel/daily oversupplied market, is unknown.