Saudi Arabia's latest strategy to send oil prices higher
The world's largest crude oil exporter, Saudi Arabia, has cut production and shipments for almost two years in accordance with the OPEC agreement, where it, as the cartel's largest oil producer, aims to lead by example.
Saudis have kept exports dampened this year – under 7 million bd a month in recent months – to prevent another major oil glut from weighing oil prices again.
However, in its lowered export levels, Saudi Arabia has dramatically shifted the priority destinations for its crude oil exports, increasing sales in the world's top oil importer – China – and shifting shipments to the United States, vessel tracking data, Chinese toll data and EIA estimates show.
The Saudis seem to be killing two birds with one stone. One goal is to reduce oil exports to the most transparent reported market, the United States, so that the short-term goal is to get global inventories to a sufficient average level, balance the market, and consequently ̵[ads1]1; hopefully for the Saudis – increase oil prices.
The second objective, a long-term goal, is to increase oil sales to China, which happens to be not only the world's top oil importer, but also one of the notoriously opaque markets in oil storage reporting.
While OPEC, EIA and market participants are looking at US and OECD oil stocks reports and data, the oil market cannot rely on China for transparent reporting of Chinese stock data.
Saudi Arabia thus loses the most transparent market, while gaining a larger market share in China, and also exploits the US sanctions against Iran to increase Saudi oil sales to the world's top crude oil importer. Related: Corn Industry Battered By Shocking Ethanol Decision
The shift in Saudi exports to the US and China is also partly a result of structural long-term shifts – growing domestic oil production and lower US imports, and the Continued growth in Chinese oil demand, EIA said in an analysis last month.
In recent months, however, it has been evident that Saudi oil sales to the United States have fallen dramatically. The weekly EIA assessment of US imports from Saudi Arabia shows that the United States is currently importing Saudi oil at the lowest levels since 2010.
U.S. Saudi oil imports in July 2019 fell 62 percent from August 2018, to just 262,053 bd, according to data from TankerTrackers.com, cited by CNBC. At the same time, TankerTrackers.com estimates Saudi exports to China to just over 1.8 million bpd – or almost double that of Saudi sales to China in August 2018.
This estimate is just below the record Chinese 1.89 million bpd imports of Saudi oil in June, which jumped 64 percent over May and shattered the previous record set in March this year.
Refueling tracking data collected by Bloomberg showed 1.74 million pd. observed Saudi exports to China in July, while observed shipments to the United States appeared to be only 161,000 bd per day – the lowest since Bloomberg began tracking tanker shipments in January 2017. Related: Trump, OPEC Jawbone Oil In Opposite Directions
While Saudi Arabia is winding down exports to the United States to build a long-term relationship in the appreciated Asian oil market and to lock in future oil demand in the region that is expected to show the only solid growth in demand the coming years and decades.
Earlier this year, the Kingdom of oil giant Saudi Aramco signed a joint venture agreement for a $ 10 billion fully integrated refining and petrochemical complex in China, which will be supplied with oil supplied by Saudi Arabia. This is just one of Aramco's recent agreements in China and India to own shares in the downstream sector in Asia, bound by long-term supply commitments for crude oil.
So it is no surprise that Saudi Arabia wants to take advantage of the absence of Iran's archive from the Asian oil market right now by increasing its sales to China. This long-term Saudi move comes at the expense of exports to the West, especially to the United States, in the short term. Given the current state of the oil market, oil prices and stocks in transparent countries reporting on them, Saudi Arabia is trying to erase the gluten right now while laying the foundations for increasing its market share in Asia and China.
By Tsvetana Paraskova for Oilprice.com
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