Saudis Take Aim at Swollen U.S. Oil Stockpiles in Strategy Shift

  • Minister promises marked drop in Saudi crude sales to U.S.
  • Kingdom shipped more crude to U.S. so far this year than 2016

After sparing its prized U.S. market from oil-output cuts, Saudi Arabia plans to "markedly" reduce exports to its political ally in the coming weeks in an effort to reduce swollen and highly visible crude inventories in the world’s biggest consumer.

"Exports to the U.S. will drop measurably," Energy and Industry Minister Khalid Al-Falih told reporters after chairing a meeting between OPEC and other major producers in Vienna on Thursday. Saudi crude shipments to the U.S. will fall below 1 million barrels a day next month, said two people briefed on the kingdom’s oil policy, a reduction of more than 15 percent from the average so far this year.

Al-Falih spoke after the group of 24 nations agreed to extend their production curbs for another nine months until the end of March 2018, a decision that in itself was a tacit admission that their first five months of cuts had failed to make a significant dent in oil stockpiles in developed economies.

By shifting the focus of Saudi export reductions toward the U.S. -- where customs data allow near real-time monitoring of shipments -- and away from less transparent markets in Asia and Europe, Al-Falih was putting his personal credibility on the line. It may be a necessary move, as the slump in oil prices after Thursday’s agreement showed growing skepticism about the effectiveness of the cuts.

"The market has been given clear independent and verifiable metric of how Saudi cuts -- and hopefully broader OPEC -- are working out over the summer,” Amrita Sen, chief oil analyst at Energy Aspects Ltd., said in an interview in Vienna.

Amrita Sen, chief oil analyst at Energy Aspects, discusses OPEC’s oil production cut.

Daybreak: Europe." (Source: Bloomberg)

Saudi Arabia has shipped 1.21 million barrels a day of crude to the U.S. on average so far this year, according to Bloomberg calculations based on official customs data. That’s the highest for that period since 2014, despite the kingdom going beyond its commitment to curb output by 486,000 barrels a day to 10.06 million.

Export plans for June will reduce shipments to the U.S. below 1 million barrels a day, said two people briefed on the matter, who asked not to be identified because the plans aren’t public. That wouldn’t affect the American market until mid-July, because it takes between 35 and 55 days for a tanker to sail there from the Middle East.

Seasonal Shifts

To be sure, Saudi exports to the U.S. often drop this time of year because the kingdom has less crude to sell due to higher domestic demand. Oil consumption in the Middle Eastern country surges during the hot summer months as crude is burned to generate electricity to meet the spike in air conditioning needs.

The average reduction in U.S. imports from Saudi Arabia between May and July was 5 percent over the past five years, EIA data show, smaller than the cut implied by the Saudi plans.

The export curbs, if implemented, would affect big U.S. refiners such as Valero Energy Corp. and Exxon Mobil Corp., forcing them to buy similar crude elsewhere, such as Mexico, Canada or Venezuela. It could also narrow the price differential in the Americas between heavy crude with high sulfur content and higher-quality light grades.

U.S. refiners will raise their light-crude intake if these cuts proceed, said Andy Lipow, a Houston-based independent oil consultant.

Fluctuations in U.S. crude imports and stockpiles have an outsize impact on the market because data are available on a weekly basis. In other regions oil traders only get official figures on a monthly basis, or not at all in the case of stockpiles in big consumers such as China and India.

The credibility of this shift in Saudi strategy will be “easily monitored," said Roger Diwan, the oil analyst at consultant IHS Markit Ltd., who attended the OPEC meeting in Vienna.

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