(Bloomberg opinion) – For the second time in three years, Saudi Arabia is reducing the amount of crude material it sends to America in an attempt to boost stocks in the world’s most visible oil market and thus accelerate the balancing of supply and demand.
Weekly data on US oil stocks – usually published on Wednesday and covering the period up to the previous Friday – are routinely compiled by both oil analysts and traders. Despite their shortcomings, the figures give the most up-to-date picture of changes in the oil balance and influence trade decisions and commodity prices around the world.
The change in the flow of crude oil from US ports can have a major impact on the level of US stocks. Riyadh has apparently decided that it is time to do everything possible to bring them down from the heights reached in May and June, when the coronavirus pandemic and the kingdom̵
Excess reserves act as a drag on oil prices, and the most visible reserves are in the United States because the Department of Energy reports energy information levels weekly. This is in stark contrast to other parts of the world, where data is much less timely, if published at all. China, for example, stopped disclosing official data on stock levels in 2017.
No wonder then that Saudi Arabia should focus on the United States. This is exactly the same policy that was adopted three years ago, shortly after the wider OPEC + alliance was formed and its first production deal ran into trouble.
At the time, members of the Organization of the Petroleum Exporting Countries and 10 non-OPEC countries, including Russia and Mexico, agreed to cut production by 1.66 million barrels per day from early 2017 to take down the world’s inflated oil reserves, built as a result of the first American shale boom. Poor implementation of cuts and rising oil production in the United States means that stocks continue to rise, despite OPEC making its first drop in production in eight years.
Today, fast forward and the reduction in the flow of Saudi oil to the United States is dramatic. In May and June, tankers full of Saudi raw arrive off the coast of the Persian Gulf and the West almost daily, sometimes more than once a day. But in July and August, that amount dropped to just over a week, as the chart below shows.
This jump in ships, which I wrote about here, briefly led to US imports of Saudi raw materials near a six-year high, adding to the upward surge in stocks. But that was short-lived, with imports in the last week of July at just 190,000 barrels a day, their second-lowest weekly figure in a decade.
The figure could fall even more in the coming weeks. There are only six tankers carrying 9 million barrels of Saudi raw materials, which are currently showing a US port as their destination, according to tracking data from tankers monitored by Bloomberg. During a trip of about six weeks from the Persian Gulf to one of the major oil ports in the United States, this is all Saudi crude oil, which is likely to arrive by mid-September.
And things probably won’t improve much after that. By setting its official raw material prices for September, Saudi Arabia has made significant price cuts for European customers, where it competes with Russia, and lower prices for buyers in Asia. But the kingdom has kept US prices unchanged since last month.
In doing so, Saudi Arabia ensures that its raw material remains uncompetitive with local heavy sour varieties from the Gulf of Mexico or imports from Canada, in a market where hopes of recovering demand are stagnant.
Leaders in Saudi Arabia and the United States want to see oil prices rise from current levels – the kingdom’s budget still depends on oil revenues and the US shale industry needs higher prices to recover. President Donald Trump may be very happy to see shrinking crude imports from Saudi Arabia – which would ultimately reflect well on his rhetoric about energy dominance in the United States.
Refocusing its decline in U.S. production, Riyadh hopes to repeat its success in the second half of 2017, when oil prices rose 51 percent from $ 44.82 in mid-June to $ 67.87. by the end of the year ,
Unless the Covid-19 pandemic eases oil demand, Saudi Arabia could find 2020 an even bigger challenge.
This column does not necessarily reflect the opinion of the editorial board or LP Bloomberg and its owners.
Julian Lee is an oil strategist for Bloomberg. He previously worked as a senior analyst at the Center for Global Energy Research.
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