Saudis Slash Oil Sales to Meet Pledge for Deeper Output Cuts
Saudi Arabia stood by its pledge to curtail oil output under the OPEC+ deal, reducing shipments to the prized Asian market.
(Bloomberg) -- Saudi Arabia will trim oil shipments to the prized Asian market in June and cut exports even more aggressively to Europe and the U.S., in a possible sop to President Donald Trump and hard-pressed American shale producers.
OPEC’s biggest member is seeking to shore up a tentative recovery in crude markets after the coronavirus crushed energy demand and sparked the oil industry’s worst crisis in decades. The Saudis are voluntarily reducing supply to the lowest level in 18 years as they lead a global effort to drain a glut that has dragged down prices by more than half this year.
State-producer Saudi Aramco will cut June exports to at least a dozen Asian customers, according to traders notified by the company. Aramco plans even deeper reductions in the amount of crude it will send to the U.S. and Europe, according to people with knowledge of the situation.
“It’s politically important to the U.S. and to Trump” that the Saudis will be sending less oil to the Atlantic Basin, said Olivier Jakob, managing director at consultant Petromatrix GmbH in Zug, Switzerland. “It’s also a gesture toward the Russians that the Saudis aren’t looking to crash the European market.”
Aramco media officials declined to comment. The people with knowledge asked not to be identified because the information is private.
Eight of the 12 refiners in Asia that had their supplies cut said the reductions were substantial, with curtailments of 20%-30% or more from contracted amounts. Most of the larger cuts were among buyers in China and India, and some of them said they were in talks with Aramco to try and get more crude. Three other regional buyers received what they asked for.
The world’s largest oil exporter will go even further, however, in curbing shipments to the U.S. and Europe, where buyers will receive only about half of the volumes they normally purchase, according to the people. Some buyers may see purchases slashed by as much 70%, the people said.
The reduction in sales to the U.S. may benefit Trump, who is keen to protect jobs in the American oil industry during an election year. The president has threatened to impose tariffs on Saudi crude imports, and he helped orchestrate last month’s output-cuts agreement between the Organization of Petroleum Exporting Countries and allies such as Russia.
Trump said this week crude prices were rising thanks to Saudi supply reductions. “Our great Energy Companies, with millions of JOBS, are starting to look very good again,” he said on Twitter.
Days after Trump spoke last week with Saudi Arabia’s King Salman, the monarchy announced it would voluntarily cut 1 million barrels of daily production. That’s on top of cuts the Saudis already pledged to make under the OPEC+ accord.
Iraq, OPEC’s second-biggest producer, is also curbing supplies to Asia. The group’s third- and fourth-largest members, the United Arab Emirates and Kuwait, said they would make additional output cuts beyond what they promised OPEC.
The decrease in shipments to Asia, the world’s biggest oil market, is likely to support premiums in the spot market for July-loading cargoes. It coincides with an improvement in demand as the Chinese economy revives from the coronavirus and consumption in India shows signs of recovering.
Russian Sokol and Iraqi Basrah crudes have already started trading at higher differentials, according to three traders who buy and sell those grades in the region.
Russia, which also sells Urals grade crude in Europe in competition with Saudi barrels, played a key role in reassembling the OPEC+ alliance to reach the April output-cuts deal and ending a global price war.
Aramco’s allocation announcement for Asia came later than usual this month, following a delay in its release of official selling prices. The Saudi price increase to Asian buyers took many of them by surprise. While the company raised prices to all regions for June, it made its biggest increases for buyers in Europe.
©2020 Bloomberg L.P.