Analysis: US braces for deluge of Saudi crude as storage faces breaking point
Saudi Arabia also slashed its crude prices for April delivery, sparking a wave of fixtures by US refiners.
Six weeks later, even with a new deal forged this month that goes into effect in May, the Saudis’ strategy is playing out with a tsunami of the kingdom’s crude headed for US shores – all while the market endures its worst shock in modern history.
Some 44 million barrels of Saudi crude – about 1.41 million b/d – is expected to reach the US over the next four weeks, according to data from S&P Global Platts trade flow service cFlow. That is about quadruple the most recent four-week average, based on the US Energy Information Administration’s records of US imports of Saudi crude.
Trading and shipping sources said some of these customers are considering cancelling or deferring their purchases as US refiners are having to cut runs to weather the demand destruction caused by the COVID-19 pandemic.
The deluge could help to overwhelm the US oil sector, which has already seen its key benchmark NYMEX WTI trade at negative values earlier this week as traders were faced with shrinking availability at the Cushing, Oklahoma delivery point.
The crude will primarily be delivered to the US Gulf Coast, where more storage capacity is available, but is still tightening. US Gulf Coast crude inventories were at 214.5 million barrels the week ending April 17, not including pipeline fill and barrels in transit, leaving stocks at 58% of working capacity, EIA data shows.
The Saudi barrels also face declining refinery runs due to the coronavirus pandemic. S&P Global Platts Analytics expects US refinery downtime to average between 3.3 million b/d and 3.4 million b/d in late April and early May.
The flood of imports could also strain bilateral relations between the US and Saudi Arabia.
“The amount of crude that is set to hit the US is just astonishing. It doesn’t make for a pretty picture and doesn’t look good for the Saudis in terms of optics,” one shipbroker told Platts on condition of anonymity. “But this is them flexing their muscle.”
A Saudi official said the deliveries are set for April-June and do not represent higher volumes than normal. He added that the barrels are not competing for US storage space with domestic barrels, “as Saudi exports are delivered to customers who send the crude directly to their refineries for processing.”
“This Saudi crude oil is of a different grade than US production and is purchased by American customers to satisfy their unique refining needs,” said the Saudi official, who asked not to be named. “As such, this crude oil complements rather than offsets or displaces US shale production.”
Awash with Saudi crude
Cflow data shows that 22 VLCCs are on their way to US ports in Texas, Louisiana and California.
Flows of Saudi crude to the US averaged 354,000 b/d for the four weeks ending April 17, according to the EIA.
Some of the coming volumes will be going to the Motiva’s 603000 b/d Port Arthur, Texas, refinery – the US’s largest — which is owned by Saudi Aramco.
Other key buyers of Saudi crude in the US have been PBG Energy’s Paulsboro, New Jersey, refinery, which imported 21% of recent supplies; and Chevron’s Richmond, California, refinery.
However, the expected arrivals have yet to impact spot USGC crude prices. In fact, medium sour Mars crude was heard bid Thursday morning at a $5.50/b premium to Cushing WTI. That was the strongest Mars premium since June 25, 2019, and suggested a tightness of USGC sour barrels.
Saudi officials say the kingdom will pare production back to 8.5 million b/d from a record high 12.3 million b/d in April to comply with its quota under the new OPEC+ deal.
But that will come too late to stop the current armada of VLCCs heading across the Atlantic, which has drawn increasing calls from oil-state US senators to block the imports or impose stiff tariffs on them, in order to aid domestic producers.
Republican Senator Kevin Cramer of North Dakota, who has advised President Donald Trump on energy issues, has been calling on the White House to take action to stop the VLCCs from unloading, and several lawmakers have threatened withhold military aid to Saudi Arabia.
Republican Senator Ted Cruz of Texas joined the fray Tuesday, tweeting: “Oil futures are plummeting & millions of US jobs in jeopardy. My message to the Saudis: TURN THE TANKERS THE HELL AROUND.”
Trump stays mum
So far, the Trump administration has signaled that it has no plans for tariffs or any other executive action to stem the Saudi tide, and analysts question whether the White House even has any options to do so.
US Energy Secretary Dan Brouillette said in a television interview with Bloomberg on Tuesday that while Trump has not taken any options off the table, he supports the free-market system.
“It’s important to remember that certain refineries in the United States are set up to take specific types of oil,” he said. “Many refiners choose to import heavy sour crude because that’s for them the most efficient, most economical way to maintain a profitable status for their businesses.”
Many US Gulf Coast refineries over the past decades have invested heavily in coking systems and other infrastructure to better handle heavier crudes from the Middle East, as well as Canada, Mexico and Venezuela.
But the US shale revolution and increased access to Canadian crude have upended trade flows, with US imports of Saudi crude – as high as 1.5 million b/d in early 2014 — plunging in recent years.
Saudi energy minister Prince Abdulaziz bin Salman has denied allegations that the kingdom was “dumping” its oil by selling it cheaply to undercut US producers.
In a press briefing last week, Prince Abdulaziz said that Saudi crude exports to the US would be around 620,000 to 630,000 b/d in April— “not a lot compared to what we’ve been doing over the last 12 months. I don’t know how people would be thinking we are flushing our oil in the US market.