When Saudi Arabia needs to quickly convince the oil market that supply is tightening, putting upward pressure on prices, nothing beats reducing its crude exports into the US.
Riyadh has promised to slash oil production next month by 10%, a unilateral cut that would reduce output to just 9 million barrels a day, the lowest since 2011 — save for brief disruptions from Covid and the Yemeni attack on its facilities. Crucially, as important as the cut itself, is where it’s going to be felt: The signals point to the US and Europe.
Focusing on the US would telegraph the reduction clearly to traders. Fluctuations in American crude imports, and ultimately, oil stockpiles have an outsize impact because Washington publishes the data weekly. In other regions, traders only get official figures on a monthly basis, or sometimes not at all, as in China and India.
It’s a tactic that Saudi Arabia used to great effect six years ago when the kingdom targeted American buyers to rewrite the market’s narrative. "Exports to the US will drop measurably," Saudi Energy Minister Khalid Al-Falih said in May 2017 after an OPEC+ meeting. By July, Saudi oil shipments to America had fallen to a 30-year low. The price of West Texas Intermediate, an oil benchmark, rose 20% from the day Al-Falih spoke to the end of the year.
Whether it can work again remains to be seen.
After the production cut, the Saudis would have less than 6 million barrels for export. The bulk of that would go east of Suez, where Saudi Aramco, the state-controlled oil giant, has told several Asian refiners they would get as much crude as they requested. That means any cuts will be felt west of Suez: Europe and the US.
Saudi Arabia can unilaterally reduce supply, but US refiners may decide to buy less Saudi oil if prices are too high versus similar varieties of crude. And Riyadh is making sure that’s the case. For July, Aramco set the premia for Arab Light, its flagship export oil grade, at an all-time high of $7.15-a-barrel above the reference for US sales. That’s more than double the highest ever premia set before the pandemic. As such, Aramco is pricing itself out of the market, and refiners would opt to buy cheaper crude varieties.
Aramco also controls the largest refinery in America, Motiva Enterprises LLC, capable of processing about 630,000 barrels a day, giving it another lever to reduce shipments. Motiva’s Port Arthur, Texas, refinery accounted for nearly 45% of all the Saudi crude that the US imported in the first quarter, buying roughly 182,000 barrels a day, according to government data. Energy Aspects Ltd., a London-based consultancy, reckons that Motiva will buy only about 25,000 barrels a day of Saudi crude in July.
If that’s the case, and considering a tanker’s 40-day trip from the kingdom to the US, Saudi flows into America will plunge in August and September. I wouldn’t be surprised if we see shipments near zero in some weeks during that period – something is seen only twice in the past 40 years.
Prince Abdulaziz bin Salman, who replaced Al-Falih as Saudi energy minister, has so far kept the market largely in the dark about where the Saudi oil production cuts would be felt. Only the size of the cut is known. Savvy oil traders will have to read the tea leaves for the rest of the story.
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