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Page added on July 23, 2017

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Saudi Arabia Turns Off the U.S. Oil Tap

Production

 

At last, Saudi Arabia seems to be doing what it takes to reduce the world’s most visible oil glut: the one in the U.S.

Unfortunately, its renewed vigor comes as OPEC’s deal to reduce excess crude stockpiles starts to show signs of unraveling elsewhere, a subject that will be wrestled with by the group’s oil ministers as they and other producer nations meet in St Petersburg on Monday.

Saudi Slump
Weekly U.S. crude oil imports from Saudi Arabia have fallen sharply since early June
Sources: Bloomberg, EIA

Data published last week by the U.S. Energy Information Administration show that imports from Saudi Arabia in the week to July 14 fell to their lowest for seven years: just 524,000 barrels a day. For sure, one week’s number doesn’t mean much on its own, particularly when a single very large crude tanker could raise or lower that figure by half.

But this isn’t an isolated figure. The EIA data show a clear drop in deliveries from Saudi Arabia since the start of June. The average rate of U.S. imports from the desert kingdom over the past six weeks has dropped by 450,000 barrels a day, or 34 percent, compared with the first six weeks of the year.

Slowing the Flow

Given that it averages six weeks for a tanker full of crude to travel from the Persian Gulf to the U.S., this drop in imports reflects a slowdown in Saudi shipments that began in mid-April, which shows up in Bloomberg tanker tracking data for the Kingdom. So Saudi Arabia is finally slashing exports to the U.S., even as shipments to other destinations — with less visible inventories — have been maintained, or even risen.

This is crucial, because the failure to drain U.S. storage tanks has been a major factor in driving down oil prices. “Exports to the U.S. will drop measurably,” Saudi oil minister Khalid Al-Falih said in May. The kingdom is now making good on that promise.

Preliminary tanker data must be treated carefully, though. Several ships show no final destination and could still end up in the U.S. Saudi crude usually moves across oceans in 1 million or 2 million barrel shipments, which means a pickup in flows to the U.S. at the end of July could change the picture dramatically.

Anyway, one has to ask whether Riyadh’s new resolve is too late as the OPEC-brokered deal to remove about 1.8 million barrels a day from the world’s supply is looking a little shakier. In June, OPEC members’ compliance with their agreed cuts fell to its lowest level since the deal came into effect (although 95 percent is still pretty good).

Fraying at the Edges
Better non-OPEC compliance in June made up for the worst performance by OPEC members
Sources: Bloomberg, OPEC, IEA

Ecuador has become the first OPEC country to say openly that it can’t afford to limit production. It may not be the last.

Iraq objected to cutting output amid a costly war with fundamentalist insurgents. It was pressured into accepting but has lagged its peers in implementation. In June it made just 28 percent of its agreed cut, according to secondary source data from OPEC.

Meanwhile, output has soared from the two OPEC members exempted from the cuts, something I warned about in this column. Libyan production this month will probably exceed 1 million barrels a day, almost twice April’s level. Nigeria is making slower progress, but output there is rising too. Neither will accept a cut, though both might come under pressure to accept a cap slightly above current production levels — similar to Iran’s compromise last year.

The Saudis have belatedly woken up to how oil traders react to a U.S. that’s visibly awash with crude. It will amount to very little unless they deal with their Africa problem.

bloomberg



14 Comments on "Saudi Arabia Turns Off the U.S. Oil Tap"

  1. rockman on Sun, 23rd Jul 2017 9:25 am 

    “The EIA data show a clear drop in deliveries from Saudi Arabia since the start of June…has dropped by 450,000 bopd” More BS from Bloomberg by showing INCOMPLETE data. According to the same EIA from the first week in June to the first week in July there has been a “drop” in ALL US OIL IMPORTS. From 8,381,000 bopd to 7,610,000. The KSA has been exporting less oil to the US because we’ve been buying 771,000 bopd less imported oil from ALL countries…320,000 bopd from countries other then the KSA.

    Just another case of Bloomberg intentionally cheery picking data to generate an eye catching headline that’s completely misleading.

  2. bobinget on Sun, 23rd Jul 2017 9:32 am 

    KSA is America’s #2 supplier. (Canada #1)

    http://www.businessinsider.com/saudi-informative-largest-oil-field-has-entered-inescapable-decline-2012-6
    Anyone with an interest in petroleum will find this
    post interesting or informative. You-pick.

    Saudi self inflicted wounds haven’t stopped bleeding.
    Stay tuned.
    The month of August should be most exciting.

  3. bobinget on Sun, 23rd Jul 2017 10:01 am 

    Saudi problems list, Rockman.
    Foreign exchange has been depleting faster than
    their elephant off-shore field, Manifa. (out of action)

    This summer, already breaking records for heat and domestic crude consumption.
    Saudi storage at record lows. (KSA cheated early in year)

    Donated Saudi crude holding Egypt in check.
    Two year old Yemen disaster will, in time, overturn
    the current ‘House of Saud’.
    KSA used up political capital in a useless ‘attack’
    on Qatar. (showed Islamic World ineffectual Saudi tactics) The three conflicts, Syria, Yemen, now Qatar are draining financial and political resources
    at an alarming speed. If word gets out Manifa is indeed pumping salt water, Expect a palace coup followed by some sort of Arab Spring events.

    http://www.businessinsider.com/saudi-arabia-problems-could-wipe-out-the-worlds-oil-glut-in-weeks-2017-7

    (in weeks?) This begs questioning, What then?)

  4. Davy on Sun, 23rd Jul 2017 10:14 am 

    “Donated Saudi crude holding Egypt in check. Two year old Yemen disaster will, in time, overturn the current ‘House of Saud’.”
    Bob, Saudi is too big to fail so they won’t fail. Can’t you understand that? If they fail we all fail. This is true until or maybe we get to the point where we have left oil enough to ditch them in the hot dry desert to cannibalize themselves. In the meantime they will survive because we want to survive.

  5. bobinget on Sun, 23rd Jul 2017 10:22 am 

    Meanwhile, Iran hasn’t attacked anyone in decades.
    Nevertheless, Congress just passed sanctions against Iran, North Korea and Russia.

    Since the US is aiding KSA’s Yemen genocide, no sanctions are in the works for killing more than 12,000 Yemeni and doing nothing to halt the deaths of thousands more from famine and decease..
    https://www.theguardian.com/global-development/2017/mar/16/yemen-conflict-7-million-close-to-famine

    At this time I’ll point out a fact not lost on most
    Muslims. Every nation Saudi Arabia aggressed
    is majority Muslim. (just not the preferred flavor)
    State Terrorism is only ‘terroristic’ when their particular religious beliefs conflict with those who control vast oil reserves.

  6. bobinget on Sun, 23rd Jul 2017 10:26 am 

    Correction; USA is NOT an Islamic majority.

  7. boat on Sun, 23rd Jul 2017 11:31 am 

    Poor bobinget just hates them Sunnie. In the Middle East your picking one group of ethnic killers over another. The world needs the oil to survive and the free world picked the Saudi. Any enemy of the Saudi/oil is an enemy of the free world. This is not new news

  8. JJHMAN on Sun, 23rd Jul 2017 12:18 pm 

    boat:

    I have trouble with the idea that I cannot hate what KSA is and does without hating the free world. Sometimes you have to do what is right, not just what suits your most egregious wishes.

  9. boat on Sun, 23rd Jul 2017 1:17 pm 

    JJHMAN,

    The history of the globe has long lists of winners and losers. How many do you care about. How many billions died needlessly.

  10. Anonymous on Sun, 23rd Jul 2017 4:53 pm 

    This obsession with movement of Saudi oil makes no sense. What matters is overall supply and demand. Occasionally the Saudis may try to influence a market (keeping Asian customers) or dumping oil in the US to lower the WTI to Brent differential a little. But the whole thing is a balloon. Buyers can run all over the world looking for cargos and the converse.

    I was at a refinery and saw the buyers deciding who to buy from. It is very hard for these types of transfers to move differentials much because other cargos just leave or show up to meet demand.

    And of course it has no effect on overall price. What matters for that is total production and total demand.

  11. bobinget on Sun, 23rd Jul 2017 6:13 pm 

    “What matters is total production and total demand.”

    Opinions;
    “Including SPR draws, we are at Feb 12, 2016 levels.

    Last year, US drew about 32 MM barrels from this point onwards until December. This year, it will be 100 MM barrels or higher.

    US will be below July 2015 levels”. (bullish)
    Kxvixwan

    another, (learned) opinion

    “We have only 6 weeks left of the high demand season. Since the Labor Day weekend demand will drop.
    Since September 10 the next maintenance season will start (actually earlier, but slowly) for about 4 weeks, and crude process will fall by ~1.5mm bpd during lowest 2-3 week period.
    Gasoline and distillate will draw larger unless imports compensate.

    Then since October to December refiner’s demand for crude will fall by ~6% due to switching to winter grades. Even if consumer consumption should remain relatively high such switching should result in average draw of maximum 1.5-1.8 mm bls per week on average for 13 weeks, and this is absolutely best IMHO. Could be zero.
    If Libya and Nigeria don’t join OPEC cap, we’d likely get builds”. Romm (bearish)

    “We don’t know”

    Re: Inventory balance headed in the right direction…. Maybe?
    “If we really do have increasing domestic production (who really knows), and if the EIA continues to project growing domestic production, I think it is going to be very difficult for EIA to report a drop of 100 mm barrels of crude inventory from here. That production growth should just put too much pressure on growth in the supply logistics barrels, to allow for that much of a draw.

    I would very much like to be wrong, believe me. But, my fear is that their methodology of counting inventory and the continued build out and “fill up” of those additional pipelines and storage facilities, will continue to mislead the market about the real state of the actual “usable” storage in the U.S. and the rest of the OECD. Of course also has to be considered in the inconsistent light of how the EIA counts foreign waterborne shipments (and I’m not just talking about the two day random custom reporting).

    Virtually all of the “expert” articles about the supply and inventory glut around the world, start with the glut that the U.S. measures (under penalty – jokingly) and reports weekly. Unfortunately those inventories include as much or possibly more than 100 mm “nonusable” supply barrels (I can’t measure them). And, unfortunately that number is growing all the time with production growth and MLP industry build out.

    It is my concern that that very activity along with the paper market are going to camouflage the actual growing tightness in the physical market. IMO, it has the potential to drive the shrinkage in the physical market (while demand continues to feed and grow off of artificially low prices) to a point where we see swing in price correction to the very high side.

    I think this is very possible and of course don’t have much feel for the timing. IMO, until the world oil markets figures out that at this point in the technology boom, oil still needs to be priced around $75 (or in that range) to make a real economic return and generate FFO to either distribute to shareholders, or engage in real exploration. As for the other side of the world, it seems clear such a price is needed for social and unfortunately military costs”.

    Taylor

  12. bobinget on Sun, 23rd Jul 2017 6:20 pm 

    Oh, about that ‘supply and demand’.
    Here’s where the fun begins;

    https://twitter.com/hashtag/cl_f?f=tweets&vertical=default&src=hash

  13. bobinget on Sun, 23rd Jul 2017 8:57 pm 

    A Reasoned Bearish Argument from Romm,

    Inventory balance headed in the right direction…. Maybe?

    You think that “inventories include as much or possibly more than 100 mm “non-usable” supply barrels (I can’t measure them).”

    In my opinion “non-usable” supply barrels account for much more than 100mm bls, perhaps as much as 250mm bls.
    However usable barrels are still very high.

    By November of 2014, when OPEC started the price war, total crude inventories were in the 350 mm bls range while Cushing stocks – at ~24mm bls. By that time US production was rising at a rate of ~1 mm bpd per year for 3.5 years.
    Oil was trading in the $90-100 range representing tightness.

    When in November OPEC declared a price war, US crude stocks were not starting jumping immediately, they were flat until January 2, 2015 instead. This may be result of 6 weeks logistics.
    When that period has expired, US crude stocks have started rising at the rate of 6-10mm bls per week peaking at ~452mm bls in the early May, or ~100mm bls were added in ~4 months.

    However when the high demand period has arrived and the Middle East summer started, US crude stocks started falling until the mid September to as low as ~422mm bls, or 30 mm bls drop.
    At that time nobody was talking about production cuts, all world producers were fighting for market share and trying to extract as much as they can. US producers were hedged at $100 oil for entire 2015 and most of them were running on all cylinders.

    But US crude stocks still fell by 30 mm bls from May to September. That ‘s because of seasonally balancing and tightness.

    Another good example is Q1-2014. We’ve got to accustom in recent 3 years that each year in Q1 especially in January-February crude inventories should rise big time due to low demand seasonality.
    Well, in Q1-14 it didn’t happen. In the first 2 months from December 27 to February 28 Crude stocks have risen from 330.7 to 332.5 mm bls, or by just 1.8 mm bls total in 8 slow demand weeks. That was due to balancing and tightness.

    My calculated guess (I don’t have actual numbers) is that by November 2014 the total non-usable crude inventories including the Taylor effect were as high as ~250mm bls while usable stocks were as low as only 100 mm bls including 20 mm bls in Cushing (usable only). Remaining 80mm bls were spread among various storage systems at refineries and elsewhere above minimum required (non-usable).

    Since November 2014 US demand has risen by ~5%, so it is fair to assume that a min required storage should be increased by 5%, or by 17.5 mm bls.
    In addition US production has risen by ~500K bpd adding tank/pipeline and Taylor effect.

    For comparison in the prior year (November 2013 to November 2014) US production rose by ~1 mm bpd while total crude inventories actually fell from ~360mm bsl to 350mm bls, or by 10 mm bls.

    In the next prior year (November 2012 to November 2013) US production also rose by ~1 mm bpd while total crude inventories rose by 10 mm bls only.

    In those 2 years oil were staying at ~$100 representing tightness. I can assume that non-usable inventories were rising at the expense of usable inventories that were declining.
    My calculating guess shows ~15mm bls per 1mm bpd production increase (Taylor effect) plus tank/pipeline volumes.

    To make the long story short – since November 2014 US production has increase by ~500mm bpd adding ~7.5mm bls to storage due to Taylor effect. In addition I estimated ~25mm bls non-usable volumes were added in tank/pipeline.

    By adding 17.5 mm bls due to demand increase, 7.5 mm (Taylor effect), and 25 mm bls tank/pipelines – in order or estimate a normalized current levels the Nov 2014 total storage should be increased by 50 mm bls – to ~400 mm bls total.

    This 400 mm bls crude figure is my target for removing inventory glut and create balancing as the Phase 1.
    Phase 2 is to remove production and spare capacity gluts. It should take 3 years at 1.3-1.5 mm bpd demand increase annually, or not-linear faster at 1.8mm bpd pace.
    But it will happen. Oil and equity prices will start discounting earlier. We are in the 8-9 innings of the bear market. GLTA.

    romm

    Poster’s note,

    Reason tells us two things;
    1) In the ME, there are several oil wars on-going.
    (Several Yemeni missile attacks on Saudi oil infrastructure are already causing migraines for KSA ‘defense’)

    2) When Venezuelan proven reserves are taken away, balance of (oil’s)power shifts away from Saudi Arabia toward China and Russia.
    bob inget

  14. rockman on Sun, 23rd Jul 2017 10:17 pm 

    “Last year, US drew about 32 MM barrels from this point onwards until December. This year, it will be 100 MM barrels or higher.” If the US draws 100 million bbls from the SPR over the next 12 months it will increase the global supply by 0.3%. Now there’s a f*cking game changer for you. LOL.

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