Saudi Arabia's "Mini Oil Embargo" May Backfire

On October 20, 1973, Saudi King Faisal announced KSA was joining in an oil embargo against the United States and Europe in favor of the Arab position in the Yom Kippur War. In an interview with international media, King Faisal said:

“America's complete Israeli support against the Arabs makes it extremely difficult for us to continue to supply the United States with oil, or even remain friends with the United States."

The price of oil quadrupled in short order, a few months. The oil shortage in America was managed by gasoline rationing by President Nixon. Drivers could buy gasoline on “odd” or “even” days, depending on the last digit of their license plate. There was also a maximum dollar amount set on purchases of $10. Motorists often had to wait in line for an hour to buy gas.

The economic impact on the U.S. and the world economy was devastating. It caused a massive recession in 1974-75, even though the embargo was lifted in March 1974. The Saudis and other OPEC producers learned how “inelastic” (i.e., non-responsive to price) gasoline demand was and their ability to stuff their coffers even with small cuts to production.

However, this episode led to legislation to build the Strategic Petroleum Reserve (SPR) as a means to offset future supply disruptions and even deter them. At present, the SPR contains roughly 650 million barrels of crude oil located in underground salt domes across the Gulf Coast.

The drawdown capacity is rated at 4.4 million barrels per day. And supplies can begin flowing into the pipeline system with 13 days of a presidential order to commence.

Saudi’s Mini Oil Embargo 

Saudi Arabia appears to be attempting to starve the US of oil supplies in a “mini-embargo.” The idea would be to signal to the world that oil supplies are lower than otherwise would be reported internationally.

In the week ending February 22nd, imports from Saudi Arabia totaled 346,000 b/d, the lowest one-week level in the data series going back to 2010. The four-week trend of 491,000 b/d was also the lowest, and 23 percent lower than a year ago. This level does not even meet the requirements of Saudi Aramco’s Motiva refinery at Port Arthur, Texas, which has a capacity of 636,500 b/d.

Despite the lack of Saudi barrels, U.S. crude stocks have nevertheless built by 4.4 million barrels since the end of December. That is because crude production is 1.9 million barrels per day higher in the year-to-date v. last year. “Other supplies,” primarily natural gas liquids are 536,000 b/d higher in that same comparison. Meanwhile, net crude imports, including exports, were 1.877 million barrels per day lower in the year-to-date v. last year. Crude inputs to refineries were 89,000 b/d higher in that same comparison.

Trump Tweet

President Trump warned OPEC on February 25th: “Oil prices getting too high. OPEC, please relax and take it easy. World cannot take a price hike - fragile!”

The Saudi mini-embargo to the U.S. may backfire by angering him. It would be a simple matter to replace Saudi imports altogether with a drawdown from the SPR until U.S. production rises another 500,000 b/d. Furthermore, the U.S. could replace Saudi barrels with imports from other sources, Iraq for example.

Conclusions

The Saudi ploy to drain U.S. crude inventories in support of oil prices is doomed to failure. U.S. domestic supply has risen greatly, and the net import need has dropped dramatically in the past year. The demand for OPEC’s oil is projected to drop by 1.0 million barrels per day in 2019. In 2020, the EIA projects that the U.S. will be a net oil exporter.

Furthermore, it could backfire if Trump calls for the NOPEC legislation – No Oil Producing and Exporting Cartels Act - to be passed. The House Judiciary Committee approved the bill. America's vulnerability to Saudi embargoes has long passed.

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Robert Boslego
INO Contributor - Energies

Crude Oil Seasonality, Inventory Rebalancing and Production Cuts

The historical stock build from December 2014 through July 2016, and subsequent decline from August through December has led some to conclude that global stocks had started to rebalance. Instead, the normal seasonality in stocks had been masked by the high overproduction of OPEC, but then normal seasonality kicked in.

Global OECD inventories from past years demonstrate the normal seasonal patterns, with some variability. As shown in this graph, stocks normal build early in the year and peak around August. Stocks normally drop from September through December. But in 2015, the oversupply was so excessive that stock just kept building through the year. They finally peaked in July 2016, then dropped off due to normal seasonal demand. This normal pattern led to a false conclusion that the rebalancing of stocks had begun.

But according to Energy Department data, OECD stocks in March 2017 are 13 million barrels higher than December. And it projects that stocks are likely to peak in May this year, earlier than normal, but to end 2017 with stocks just 14 million lower than a year ago. This is based on the Energy Information Administration ((EIA)) assumption that OPEC does not hold production to its March level. Furthermore, the EIA projects global stocks to set new record highs in 2018, after the OPEC non OPEC cuts presumably end.

Effect of Production Cuts

Some argue that the 285 million barrel excess above the 5 year average as of the end of December should disappear in five to six months by dividing 285 million by 1.8 million barrels per day, the agreed upon size of the daily cut. But that math first assumes that supply was in balance with demand, makes no allowance for rising supplies, such as in the U.S., and it does not take into account the seasonality.

According to OPEC’s figures, global OECD stocks are likely to build both in the first and second quarters, and then decline in the second half of the year, assuming OPEC production remains at the March level.

There was one development last week, if true, did shift the inventory trend lower. The EIA revised its December estimate of OECD stocks down 105 million barrels, a major revision. That reduced the size of the glut to 201 million above its five year average.

Conclusions

The market dropped sharply in early March as a result of the continued rise in stocks. The market has falsely expected to see inventories to soon decline as a result of the production cuts. But seasonal factors need to be taken into account. We should see global stocks decline in the second half of 2017, assuming OPEC extends its cuts. And the decline may start earlier than normal because U.S. refinery utilization is ramping up faster and earlier than usual, thereby requiring more crude oil.

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Robert Boslego
INO.com Contributor - Energies