Welcome to the hammer edition of Oil Markets Daily!
U.S. crude storage, that's the only thing the Saudis care about right now. If U.S. crude storage drops, oil prices go up. It's easy as 1-2-3. But the recent closure of the Houston Shipping Channel is disrupting the flows of import and export, but more importantly, the timing. Just as Aramco (ARMCO) was about to finalize May official selling price (OSP) for customers, the U.S. reported two back-to-back builds in storage. On the surface, the insiders understand that the timing was what caused the build, but for most people, this is bearish!
In the eyes of the Saudi politicians, this is a policy failure. If Saudi had already dropped exports to U.S., then why is U.S. crude storage still building? The answer then is that "more" must be done!
As a result, Aramco announced a 10 cent increase for Arab light to what was already a stupidly high premium to the U.S. The 10 cent increase brings Arab light pricing to the U.S. at +$3.15/bbl. On the surface, a 10 cent increase seldom grabs anyone's attention, but keep in mind that this is on top of the +$3.05/bbl premium to the U.S.. For a U.S. refinery to buy Saudi's Arab light, it has to almost pay a ~$10/bbl premium to WTI. Now why would anyone do that?
Since Aramco increased OSP to the U.S. back in November 2018, Saudi exports to the U.S. have dropped from ~800k b/d to ~350k b/d in March. This pricing increase relative to Saudi crude exports is likely to drop this even further. We suspect we will see some new record lows in April. And because this pricing is announced for May, exports to the U.S. for May are likely to stay depressed as well.
And if you are doing the math in your head, if Saudi keeps exports low to the U.S. in May, then those barrels arrive in July, which is the heart of the refinery demand month. This means U.S. crude storage would fall like crazy.
But the more bullish side news today was the fact that Aramco increased OSP to both Asia and Europe as well.
Now remember that a big part of the draw in U.S. crude storage comes from U.S. crude exports. By increasing OSP to Europe, for example, Saudi is effectively saying that U.S. crude exports could stay high. If you look at the OSP, Saudi discounted massively to Europe in June last year, which was also the same time when U.S. crude exports started to stall. This combo of increasing OSP to the U.S. and increasing OSP to Europe effectively lowers supplies in the U.S., while boosting U.S. crude exports. In addition, Saudi increased OSP to Asia, which opens the market for shale light oil to be exported to Asia.
What's stupidly clear from today's Aramco OSP is that Saudi is dead serious about draining the excess storage out of the U.S. There has to be pressure from the top for Aramco to have taken this extraordinary step, because in our view, what they were doing is working already. But the short-term timing impact is forcing Saudi's hand.
With today's announcement, it is only a matter of time before U.S. crude storage drains. Saudi is unleashing the hammer on U.S. crude storage, so buckle up.
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Disclosure: I am/we are short DWT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.