LONDON, July 22, (RTRS): Saudi Arabia is making good on promises to curtail oil shipments to the United States with the likely intention to drain visible inventories and support prices.
The United States imported an average of 524,000 barrels per day (bpd) of crude from Saudi Arabia in the week ending July 14, the lowest volume for more than seven years.
Imports from Saudi Arabia averaged just 810,000 bpd over the last four weeks, according to the US Energy Information Administration (EIA), the slowest rate since January 2015.
Crude arrives on supertankers carrying an average of around 2 million barrels so the weekly import numbers exhibit a lot of volatility linked to the timing of tanker arrivals.
Imports are only reported to the US Energy Information Administration when the crude has cleared US customs so weekly volumes are sensitive to the precise timing of customs clearance. But there is no mistaking the downtrend in imports of Saudi Arabian crude since the start of June which seems set to continue until at least the end of August.
On July 20, there were 15 very large crude carriers and 3 Suezmax tankers identified en route from Saudi Arabia to the United States, according to Kpler, a global cargo-tracking firm based in Paris.
The number included some partially loaded tankers already off the US coast waiting to complete discharging, according to an analysis by Kpler. There are also a couple of Saudi cargoes with unclear final destinations.
But at the same point in 2016, there were 25 very large or ultra large crude carriers and 3 Suezmax tankers voyaging from Saudi Arabia to the United States.
Saudi officials have openly discussed reducing shipments to the United States in recent weeks. Saudi crude exports to the United States will be below 800,000 bpd in August, a Saudi industry source familiar with production policy told Reuters (“Saudis to cut Aug oil exports to lowest level this year”, Reuters, July 12).
Crude and product stocks in the United States are the most transparent and high-profile element of global inventories thanks to the weekly records published by the EIA.
Many traders and analysts use weekly stock data from the EIA as a proxy for changes in the global supply-demand balance, even though they may not be representative of the whole market.
Saudi Arabia and its OPEC and non-OPEC allies are keen to demonstrate to a sceptical market that output cuts are finally drawing down bloated stocks.
So it makes sense to curb shipments to the United States to try to accelerate the reduction in the highly visible stocks held in North America.
Crude and fuels markets are global not regional, and oil will find a way of flowing to where it is most needed or convenient to store.
Total crude imports to the United States have fallen in recent weeks which, coupled with heavy refinery runs, has helped cut domestic crude stocks faster than normal for the time of year. But there are indications reduced Saudi shipments to the United States are being partially replaced by increased shipments from Iraq as refiners seek the closest alternative medium-heavy sour grades.
And Saudi shipments have increased to India and Japan, according to vessels and cargoes tracked by Kpler, which may be offsetting some of the reduction to the United States.
Meanwhile, the US gasoline surplus has disappeared thanks to a sharp drop in prices which has caused imports from Europe to slow and exports to Latin America and other markets to accelerate since the start of June.
US refineries are processing record volumes of crude while domestic gasoline consumption appears to be holding steady at the same level as 2016 which threatened to flood the market with excess fuel.
But low domestic gasoline prices at the start of the summer driving season have encouraged the diversion of tanker shipments from Europe and incentivised US refiners to boost their own exports. The United States was a small net exporter of gasoline in the four weeks to July 14, compared with net imports of 450,000 barrels per day (bpd) at the same point in 2016 and 411,000 bpd in 2015.
US gasoline imports are running around 240,000 bpd below year-ago levels, while exports are up by almost 230,000 bpd, according to data from the US Energy Information Administration. The shift in the net trade position helped clear excess inventories that built up earlier in the year and had been weighing on gasoline prices.
On June 9, US refiners, importers and fuel blenders reported gasoline stocks of 242 million barrels, almost 5 million barrels higher than in 2016 and 28 million barrels over the 10-year average. Stocks were equivalent to around 26 days of implied domestic consumption compared with 25 days at the same point in 2016.
By July 14, five weeks later, stocks had fallen to 231 million barrels, almost 10 million barrels below 2016 levels and only 15 million barrels above the 10-year average.
Gasoline stocks had been reduced to just 24 days of implied domestic consumption compared with almost 25 in 2016.
Aided by lower prices, the United States has traded its way out of an impending gasoline glut with increased exports to markets in Latin America and European shipments diverted to West Africa and Latin America.
Hedge funds and other money managers seem to have anticipated a fall in gasoline prices needed to clear excess inventories and may have accelerated the rebalancing process.
Hedge funds established a rare net short position in gasoline by early May of almost 21 million barrels and then a similar-sized net short position again by late June.
Since then, hedge fund managers have closed many short positions, as gasoline stocks have fallen to more normal levels. Hedge fund short positions in US gasoline declined from 70 million barrels in early May and 68 million barrels in late June to just 45 million barrels on July 11.
By July 11, hedge funds had re-established a net long position in US gasoline futures and options equivalent to almost 7 million barrels, anticipating a further increase in prices now that the glut has been cleared.