Crude Oil Trade: Saudi Arabia and UAE committed to production cuts, even if US inventories increase

Saudi Arabia is determined to proceed with the plan of OPEC+ to maintain oil production at low levels. March is estimated to have only reached 9.8 million barrels per day (bpd) with the country's oil minister suggesting that output will drop further this month. This is expected to support oil prices close to, if not above, USD 70 per barrel. Meanwhile, Saudi Aramco increased its prices for May-loading cargoes. Increases are only marginal for Asian destinations, but higher for European ones (including the Med).

Focusing on shipments, Saudi Arabia seems to have slightly increased its exports to its major importer, Japan. The appetite of South Korea seems to be quite strong as well, while China is marginally lower than what we would have typically expected. India seems to have already started importing more from other exporters like Venezuela, Mexico and the US.

The Kingdom is not expected to return close to the record high of the last two years achieved in November 2018, when Saudi Arabian crude oil exports reached around 8.25 million bpd. Back then, Saudi Arabia's priority was to support the market in anticipation of the US sanctions on Iranian barrels. Now, it's all about the price, as its efforts are focused on rebalancing the market and pushing prices higher. It won't be a big surprise if Saudi Arabia decides to keep its crude oil exports below seven million bpd, even if demand seems to be there and ready to absorb at least 7.6 million bpd of Saudi Arabia grades. With oil production at around 9.8 million bpd, it means that the country has not only met its commitment in the OPEC+ deal, but further dropped its output by half a million bpd. According to Saudi Arabia officials, April's production could fall to 6.9 million bpd.

Meanwhile, Riyadh recently made it clear that there is no plan to change its longstanding policy of trading oil in US dollars. Earlier this month, reports suggested that the Kingdom has been threatening to sell its oil in other currencies as a response to the US Congress potentially passing legislation exposing OPEC to American antitrust laws. But Saudi Arabia officials immediately denied this, calling all these reports inaccurate, highlighting that the country and the US are close allies.

However, the role of Saudi Arabia is not an easy one, as the country should consider what will follow now that US inventories seem to be increasing, with some OPEC members understood to already be considering their exit from the agreement on production cuts. Meanwhile, some OPEC producers are reconsidering the extension of their production cuts beyond June. Different voices across the market tend to agree that the OPEC+ deal would need to remain in place through the end of this year in order for oil prices to remain close to USD 70 per barrel.

But some of the developments in the market and the quick recovery of oil prices must have surprised OPEC itself, at least to an extent. Apart from the cartel reducing its output by more than a million bpd, US sanctions on Venezuela and Iran meant additional losses for global supply, that cannot simply be ignored. Both countries seem to have done much better in February and the first half of March, which pushed the average liftings to above one million bpd for Iran in March, while Venezuela managed to maintain activity around 880K bpd since the US imposed sanctions on its barrels. But April is expected to be a much worse month for both, as production is set to decline, with shipments to follow the same trend. We have to clarify that some of the volumes reported in the chart below only refer to deals agreed weeks ago that managed to get loaded recently. This means that real activity is significantly lower than what the following numbers suggest. Electricity problems in Venezuela allowed almost no vessels to load cargo during the last week of March in the Jose terminal, while Iran will face the expiration of waivers that the US granted to eight countries. These will last for just a few more weeks, with countries like Japan and South Korea already understood to have halted imports from Iran.

Meanwhile, OPEC and primarily Saudi Arabia will need to consider all these developments in the market, as apart from oil prices, there should be interest in the cartel's market share as well. Saudi Arabia's minister of energy and mineral resources Khalid al-Falih has been repeatedly confirming his country's view is in favour of the OPEC+ production cuts being extended. Memories of last year seem to be still quite strong, when the cartel abandoned the production cuts and the oil market quickly crashed.

In parallel, the energy minister of the United Arab Emirates, Suhail Al Mazrouei, expressed exactly the same view, commenting that OPEC and its allies are committed to proceed with the production cut deal and rebalance the market. He also referred to the "lesson" learned last year, ensuring that the cartel won't repeat last year's preemptive production increase, as it happened in the summer of 2018. This was driven by OPEC+'s earlier belief that the US would cut off Iran's oil exports to zero, as nobody expected the US to grant waivers to Iran's biggest oil customers.

Posted 23 April 2019 by Fotios Katsoulas, Associate Director, Lead Analyst Tanker Shipping & Alternative Fuels, S&P Global Commodity Insights