2 Experts: Why Saudis Cut U.S. Oil Shipments

Saudi Arabia is curtailing oil shipments to the United States.

What’s that? You thought the United States was a net exporter of oil products? Well, net is the key word.

There are two key reasons the Saudis are cutting. John Kemp, a Reuters market analyst, explains the first one:

“Saudi Arabia is making good on promises to curtail oil shipments to the United States with the likely intention to drain visible inventories and support prices. The United States imported an average of 524,000 barrels per day of crude from Saudi Arabia in the week ending July 14, the lowest volume for more than seven years …”

Indeed, the Organization of Petroleum Exporting Countries production cuts extended though 2017 may have reached their limits in raising prices, with Nigeria and Libya exempt and cranking out hydrocarbons. Russia and Iran aren’t in OPEC and can’t be relied on to curb production. As supplies rise, prices fall. The price of crude was down 0.8% in recent trading with the international Brent price at $48.92 per barrel, and the U.S. price at $46.55.

The other reason the Saudis may be motivated to cut? The U.S. government has contemplated curbing U.S. oil imports from OPEC member Venezuela. However, if the U.S. has less Saudi oil, it may not be able to cut off Venezuela oil. Doing so is one way the United States can pressure the indebted leftist Venezuelan government, which has little cash left to make big debt payments this fall. The latest monthly OPEC report showed Venezuela’s oil production fell. Venezuela is the third largest foreign supplier of U.S. oil, and overall, Venezuela has been producing more oil than OPEC members Nigeria and Kuwait.

OPEC ministers meet Monday. Helima Croft, global head of commodity strategy at RBC Capital Markets, observes:

“The July 24 Joint Ministerial Monitoring Committee meeting in St. Petersburg will take place amidst rising uncertainty about OPEC coherence following Ecuador’s decision to exit the output agreement for revenue reasons, and concerns about rising Libyan and Nigerian production. Ecuador’s move underscores the sharp divergence in the economic fortunes of the sovereign producers, with the most cash strapped states in urgent need of financial relief and the flusher nations having the time, and perhaps even the incentive, to let the current cut run its course. … We believe the meeting statement will signal a determination to deal with the additional volumes. Libya and Nigeria are … reluctant to accept any output restrictions. Offering both countries an arrangement similar to Iran looks viable in our view, but it will be an uphill battle to obtain their consent. Thus, the Saudi Oil Minister Khalid Al-Falih may in the end have to make good on his May 25 pledge to make room for these countries by further restricting output, but we still do not expect a much deeper cut to be announced on Monday. …”

The United States Oil Fund (USO) was down roughly 1% in early trading. The iShares MSCI Saudi Arabia exchange-traded fund (KSA) was not yet trading, and the VanEck Vectors Russia ETF (RSX) was down 0.7%. Among emerging market energy companies, Brazil’s Petroleo Brasileiro or Petrobras (PBR) was down 0.9%. ExxonMobil (XOM) was down 0.5%.

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