By Sheela Tobben and Julian Lee
Earlier this week, OPEC and its allies reviewed their production plans, allowing small increases for Russia and Kazakhstan in February and March, with the rest keeping production unchanged. Then Saudi Arabia surprised even its fellow producers by announcing a unilateral cut to its own production of a further 1 million barrels over the next 2 months. The OPEC leader’s decision caused global benchmark Brent oil futures prices to surge beyond $54 a barrel and its U.S. counterpart, West Texas Intermediate crude, to break through $50.
The supply cuts which date back to a producer agreement last year, have helped shore up crude prices, even as fuel consumption struggles to return to pre-pandemic levels. In the past month, oil prices have risen on hopes that demand could improve as a number of vaccines are starting to be administered to combat the health crisis.
“While the U.S. imports of Saudi oil hitting zero is historic, its likely this is temporary and and only an aberration given the current low refinery runs and deep Saudi production cuts that are going to increase, against the backdrop of the ongoing pandemic environment,” said Karim Fawaz, Director of Research and Analysis for Energy at IHS Markit.
America is still in the throes of the pandemic, with record infections in many states forcing new restrictions, while some other parts of the world are recovering. U.S. gasoline consumption plunged to the lowest in years during the usual high-demand Thanksgiving and Christmas holiday periods.
The demand loss is so acute some U.S. refineries have been idled. “Throughput is still below where it was before the crisis because of reduced domestic demand. So why send more here when Asia is where recovery has been clear,” said Sandy Fielden, director of oil and products research at Morningstar Inc.
For Saudi Arabia, cutting shipments to the U.S. is the quickest way to signal to the wider market that it’s tightening supply. The government is alone in publishing weekly data on crude stockpiles and imports, which carry enormous influence among oil traders. Other big petroleum consuming nations, like China, publish less timely information about oil supplies.
In May and June, Saudi deliveries to the U.S. more than doubled from a year ago in the aftermath of a bitter price war with Russia. The onslaught prompted Senator Ted Cruz, a Texas Republican, to tweet in April: “My message to the Saudis: TURN THE TANKERS THE HELL AROUND.” American refiners received the final installment of that bumper load in early July.
Since then, Saudi oil shipments to the U.S. have steadily declined. In November and then again in December, they delivered only 73,000 barrels a day to customers, preliminary U.S. Energy Information Administration data show.
In the short term, the election of Joe Biden could benefit Saudi Arabia. While transitioning away from hydrocarbons would have a long-term impact on oil demand, hopes to revive the 2015-Iranian nuclear deal would pave the way for more Iranian oil to flow globally. “Those sales will displace Saudi oil and that would mean Arabia would have to turn to the U.S. to maintain sales,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston.