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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 U.S.
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 U.S. and Europe.
Focusing on the U.S. 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 U.S. 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.
For one, the U.S. is now far less dependent on Saudi crude. Back in mid-2017, the U.S. regularly bought 1 million barrels a day of Saudi crude. So far this year, it has bought an average of less than 500,000 barrels a day.
Still, it's probably the best chance Riyadh has to jump-start prices. Despite robust demand growth this year, a flood of crude from Russia, Iran and Venezuela - all under Western sanctions - has overwhelmed consumption. As a result, West Texas Intermediate has struggled to sustain the $70-a-barrel level. Going after the U.S. and European markets has an advantage for Riyadh: Neither can switch to Russian or Iranian supplies, something that refiners in Asia do every day.
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 U.S.
Saudi Arabia can unilaterally reduce supply, but U.S. refiners may decide to buy less Saudi oil if prices are too high vs. 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 U.S. 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, capable of processing about 630,000 barrels a day, giving it another lever to reduce shipments. Motiva's Port Arthur, Tex., refinery accounted for nearly 45% of all the Saudi crude that the U.S. imported in the first quarter, buying roughly 182,000 barrels a day, according to government data. Energy Aspects, 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 U.S., 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 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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Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He previously was commodities editor at the Financial Times and is the coauthor of "The World for Sale: Money, Power, and the Traders Who Barter the Earth’s Resources."