Judging the Saudi-Russia Oil Freeze Comes Down to Binoculars

What Saudi-Russia Oil Deal Means for Markets
  • 50-year-old tanker-tracking system key to measuring results
  • At stake is a push by big producers to manage crude prices

Judging the supply of the world’s most important commodity often comes down to a good set of binoculars.

In a world of Twitter, iPhones and instant information, determining how much oil is pumped by global producers is a moving target. It relies on a 50-year-old tanker-tracking system to help offset national interests that can shroud the data in secrecy and deceit. The problem: Competing analysis of that data often results in different outcomes.

The International Energy Agency will tell you that OPEC pumped 32.6 million barrels a day in January. Ask the U.S. Department of Energy, and the answer is one million barrels a day less. While measuring output is always important, it’s likely to become even more key after a tentative pact announced last month by Saudi Arabia, Russia and others to freeze output at January levels. At stake is a stubborn price rout that’s pummeled economies, markets and companies.

"Over the next couple of months, Saudi Arabia and Russia would like to see that the freeze is working; that tanker-tracking data doesn’t show an increase in output," said Yasser Elguindi, an oil analyst at New York-based consultant Medley Global Advisors.

Measuring Depth

To do this, the industry counts on a small group of little-known companies whose main job is to count the number of tankers leaving ports, at best using data gathered from satellites, at worst using simple binoculars. They then guess how much crude is being carried by measuring the depth of the vessels in the water.

Swiss-based Petro-Logistics S.A., one of those companies, calls its work "the art and science of tanker tracking,” with the aim being to discover what oil producers "are really doing as distinct to what they say they are doing," according to a statement on its website.

While the information produced by companies such as Petro-Logistics and U.K.-based Oil Movements serves as a main input for estimates by consultants, traders and official bodies, it’s not the only measurement stick in use.

The matter becomes even more complex for oil moved within pipelines. Russia, for instance, exports roughly 30 percent of its crude via pipeline, according to official data. That flow is most often measured by independent groups using infra-red photography, which provides only a rough approximation of output.

The Organization of Petroleum Exporting Countries traditionally has published a measure of production based on what the group calls "secondary sources," in effect consultants who calculate flows from a variety of sources, including tanker tracking data. The cartel also publishes production figures based on what OPEC countries release publicly.

10% Difference

At times, these figures can be very different. For instance, the United Arab Emirates has listed data in the past showing output that was as much as 10 percent higher than the figures produced by OPEC.

The IEA and the U.S. government also publish estimates, as do many news organizations, including Bloomberg. The most recent addition to this flood of information is the Joint Organisations Data Initiative (JODI), a project begun in 2002 that’s backed by some of the world’s richest countries.

Although all of these sources rely on tanker-tracking data as a base of their data, each group also incorporates its own market intelligence and different methodologies to come up with their data

‘Beginning a Process’

Over the next few months, these are the methods that will determine how successful the freeze agreement announced by the world’s two largest producers has been. The deal, which includes Qatar and Venezuela, has been called the “beginning of a process” that could require “other steps to stabilize and improve the market,” by Saudi Oil Minister Ali Al-Naimi after representatives of the two countries met in Doha, Qatar.

"If the Doha meeting is even the start of some agreement on baseline production numbers, then it may open the door to more cooperation in the coming months," said Amrita Sen, chief oil analyst at consultants Energy Aspects Ltd. in London.

It also may open the way for more confusion. Ahead of a production cut, countries have an incentive to claim they pump more than they do to minimize the real impact of any future curb.

In the past, agreeing to a baseline number for production has often proved more difficult for OPEC than deciding the size of a possible cut, and traditionally has required some political maneuvering. In 1999, for example, Iran only agreed to accept OPEC cuts after Saudi Arabia accepted a baseline for Tehran of 3.6 million barrels a day, rather than 3.3 million.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE