Saudi Arabia Reduces Oil Exports to the U.S. to Strengthen Prices

Saudi Arabia is attempting to support prices by reducing its oil exports to the United States. According to Reuters and the U.S. Energy Information Administration, the U.S. imported an average of 900,000 barrels per day from Saudi Arabia in the four weeks ending July 7. U.S. oil imports from Saudi Arabia are at their lowest rate since 2015, marking the lowest level for this time of year in the past five years. According to a Saudi source familiar with the country's oil policy, U.S. imports from Saudi Arabia may further decline to less than 800,000 barrels per day. Saudi Arabia is reducing exports to all buyers, but the reduction in exports to the U.S. is particularly significant because U.S. reserves are the most visible and have the greatest impact on prices. More than 40 percent of commercial crude oil and petroleum product reserves in the OECD belong to the U.S. Therefore, the crude oil and products of this country are of great interest to oil traders and analysts and can have a major impact on global prices. After Canada, Saudi Arabia is the second-largest supplier of oil to the U.S., exporting an average of 1.1 million barrels per day to the country in 2016. By limiting exports, Saudi Arabia hopes to prove to pessimistic traders that its long-term goal of rebalancing the market is finally being realized. This strategy seems to have been somewhat successful in reducing U.S. reserves, which have decreased by 40 million barrels since the end of March, while in the same period in 2016, the decrease was only eight million barrels. Currently, U.S. crude oil reserves are only three million barrels above the same period last year. Senior Saudi officials and other OPEC member countries hope that the downward trend in U.S. oil reserves will continue throughout the summer. This Saudi strategy has a relative chance of success but may be threatened by U.S. oil imports from other OPEC member countries and non-member producers, or by changing Saudi oil exports from the U.S. to other markets. While Saudi oil exports to the U.S. have decreased, Iraqi oil exports have reached their highest seasonal level in nearly five years. According to the International Energy Agency, compliance with the production cut agreement among OPEC members sharply decreased in June, reaching the lowest level in six months. Increased oil production from Nigeria and Libya, which are exempt from the OPEC agreement, has contributed to the increase in OPEC oil production, resulting from weak compliance among other members. Part of this increase in production could counteract Saudi Arabia's efforts to reduce U.S. reserves and once again increase those reserves. Oil traders will also monitor any changes in shipping routes to keep an eye on rising reserves in less scrutinized locations. After August, the question remains what will happen to exports and reserve levels after the months of high driving in the U.S. end and crude oil consumption in Saudi Arabia and Iraq declines due to the end of the air conditioning season. Currently, OPEC hopes that the continuous reduction in U.S. crude oil reserves will be interpreted as the market once again moving toward balance and prices should rise.