The world’s top crude oil exporter, Saudi Arabia, has been cutting for nearly two years its production and shipments as per OPEC’s deal, in which, being the cartel’s largest oil producer, it aims to lead by example.
The Saudis have been keeping their exports subdued this year—below 7 million bpd in recent months—to prevent another large oil glut from weighing down on oil prices again.
In its lowered export levels, however, Saudi Arabia has dramatically reshuffled the priority destinations of its crude oil exports, boosting sales in the world’s top oil importer—China—and slashing shipments to the United States, vessel tracking data, Chinese customs data, and EIA estimates show.
With the export volume and destination reshuffle, the Saudis look to kill two birds with one stone. One goal is to reduce oil exports to the most transparently reported market, the U.S., for the shorter-term target to have global inventories drop to adequate average levels, rebalance the market, and consequently—hopefully for the Saudis—prop up oil prices.
The other goal, a longer-term one, is to boost oil sales to China, which happens to be not only the top oil importer in the world, but also one of the notoriously opaque markets when it comes to reporting oil inventories.
While OPEC, the EIA, and market participants look at U.S. and OECD oil inventory reports and data, the oil market can’t rely on China for a transparent reporting of Chinese inventory data.
Saudi Arabia is thus draining the most transparent market, while seizing a larger market share in China, also taking advantage of the U.S. sanctions on Iran to boost Saudi oil sales to the world’s top crude oil importer.
The shift in Saudi exports to the U.S. and China is also be partially a result of structural long-term shifts—growing domestic U.S. oil production and lower U.S. imports, and the continuous Chinese oil demand growth, the EIA said in an analysis last month.
In recent months, however, it has been evident that Saudi oil sales to the U.S. have drastically dropped. The weekly EIA assessment of U.S. imports from Saudi Arabia show that the United States is currently importing Saudi oil at the lowest levels since 2010.
U.S. imports of Saudi oil in July 2019 slumped by 62 percent from August 2018, to just 262,053 bpd, according to data from TankerTrackers.com, as cited by CNBC. At the same time, TankerTrackers.com estimates Saudi exports to China at just over 1.8 million bpd—or nearly double compared to the Saudi sales to China in August 2018.
This estimate is just below the record 1.89-million-bpd Chinese imports of Saudi oil in June, which jumped by 64 percent over May and smashed the previous record set in March this year.
Tanker tracking data compiled by Bloomberg showed 1.74 million bpd observed Saudi exports to China in July, while observed shipments to the U.S. appeared to be just 161,000 bpd—the lowest since Bloomberg started tracking tanker shipments in January 2017.
While Saudi Arabia slashes exports to the U.S., it is looking East to build a long-term relationship on the prized Asian oil market and to lock in future oil demand in the region expected to show the only solid growth in demand in the coming years and decades.
Earlier this year, the Kingdom’s oil giant Saudi Aramco signed a joint venture deal for a US$10-billion fully integrated refining and petrochemical complex in China, which will be supplied with oil delivered by Saudi Arabia. That’s just one of the deals that Aramco has recently signed in China and India to hold stakes in the downstream sector in Asia bound by long-term crude supply commitments.
So it’s no surprise that Saudi Arabia is looking to take advantage of the absence of archrival Iran from the Asian oil market right now by boosting sales to China. This Saudi move for the long term comes at the expense of exports to the West, to the U.S. in particular, in the short term. Given the current state of the oil market, oil prices, and oil inventories in countries transparently reporting them, Saudi Arabia is trying to erase the glut right now while laying the foundations to boost its market share in Asia and China.