(Bloomberg Opinion) -- Saudi Arabia confronts something of a dilemma. On the one hand, it really wants to put the squeeze on arch-rival Iran, and few things squeeze that country harder than the resumption of U.S. sanctions on its oil exports. Yet the mere prospect of taking that much oil off the market has helped to raise gasoline prices in a midterm-election year in the U.S., prompting tweeted demands from President Trump that Saudi Arabia reciprocate by pumping millions of extra barrels to fill any shortfall. Open the taps too much, though, and Riyadh would risk undoing all the work of the past 18 months or so to support prices.
What’s a crown prince to do? One option is to shift around the merchandise rather than just produce more of it.
When OPEC and its associates began withholding oil supply in 2017, Saudi Arabia targeted the U.S. in particular. In a global oil market characterized mostly by incomplete and out-of-date data, the weekly figures for U.S. inventories — usually released on a Wednesday — provide a relatively reliable and near-time window into supply and demand. Even though the U.S. comprises only a fifth of the global oil market, the mere availability of those data enhances their impact.
So if you’re Saudi Arabia and you want to show the world that supply is tightening, you do your best to empty the American storefront first. Saudi Arabian Oil Co., or Saudi Aramco, reduced the discount on its medium and heavy-grade barrels for the U.S. sharply last summer, effectively deterring buyers. U.S. imports, which averaged almost 1.2 million barrels a day in the first half of 2017, fell by 40 percent in the second half — and inventories began to follow:
Conversely, if Saudi Arabia now wants to demonstrate to the world — including Washington — that it can offset the effect of resumed sanctions on Iran, having more oil show up in American storage tanks is a no-brainer. Already, imports are running north of 800,000 barrels a day, up from an average of about 700,000 in the first quarter.
Besides raising actual output, though, Saudi Arabia also has the option of shifting some of its own stockpile westward. While that inventory has also been falling (since late 2015), the country still had an estimated 234 million barrels in tanks at the end of April:
In theory, assuming stockpiles haven’t changed since April, Saudi Arabia could top up its exports with an extra 500,000 barrels a day drawn from inventory between now and the U.S. midterms, and still have 175 million barrels in reserve. Saudi Arabia’s exports to the U.S. would rise comfortably back above one million barrels a day, and relatively quickly.
This would, of course, eat into another of the global oil market’s shock absorbers. But as a short-term policy, those barrels would probably do more to alleviate the risk premium if they showed up more prominently in America. As Barclays analyst Michael Cohen points out in a report this week, boosting Saudi Arabian exports to the U.S. with the aid of swapping stocks out would also help to alleviate any shortage of Venezuelan heavy-grade crude oil for refineries on the coast of the Gulf of Mexico.
Above all, by shifting barrels out of domestic storage tanks and into U.S. ones, Saudi Arabia could quickly show willing to a president who’ll be eyeing pump prices nervously over the next four months. And that, in turn, could persuade him to hold off draining oil out of his own particular stockpile: namely, the Strategic Petroleum Reserve.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
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