We’ve compiled two years of our data covering Saudi Arabia’s Crude Oil Exports since October 2017 in order provide further insight into how the kingdom manages the oil market. We have three charts that offer an interesting angle on the topic.
The graph below shows the relationship between Saudi oil exports vs the oil price itself. The direction of shipments fairly quickly follow the oil price. So, if one month the oil price rises, then Saudi takes the opportunity to ship out more oil. When the price drops, so do the shipments. It shows that the kingdom is trying to maintain a less volatile market by correcting it in a trailing fashion. They are seeking price stability rather than high volatility. If they were to cut supply while prices fly higher, then they’ll risk dampening demand due to a very high oil barrel price. And in turn, if they were to boost exports while price is down, then they’ll risk trashing the oil price even if it helps the consumer; as well as helps Saudi Arabia attain more market share from its competitors such as during 2015-2016 during OPEC’s war against US shale. So as you can see, there’s very little lag between price and shipments. That will be an interesting signal to look at in the future.
Second, we have a graph showing how much oil Saudi Arabia ships to the world’s Top 6 destinations, and the first thing that clearly sticks out is the radical shift in exports to China vs the United States. Given US’s relentless domestic oil production growth over the past few years (by 2.5 times over the past decade!), Saudi Arabia took the decision two summers ago to slash exports towards the US in an effort to impact the weekly US EIA Inventory Reports. It hasn’t proven to be entirely effective due to US production growth. One should however keep in mind that US inventory doesn’t necessarily have to be impacted by production, but by how much it imports and/or exports. For example, if exports start averaging 500Kbpd less due to shortage of tankers, then that means that there’ll be an extra 3.5 million barrels still available in storage for the week. From our observations, US exports are fairly wobbly, and one particular reason for that is because of the trade war with China. When China buys, then they tend to buy a lot. And when they don’t, then exports lay lower. As a result, Saudi Arabia boosts exports to China, and even though China is undergoing a slower GDP growth (yet still at/over 6%), China is maximizing the opportunity to import record amounts of oil during the slowdown. When there’s a slowdown, then refineries process less amounts of oil, and therefore whatever extra is being imported ends up being tucked away into storage. China is currently buying oil from pretty much all corners of the Earth except the US. Saudi Arabia is there to meet more than 1/6th of China’s total intake.
Finally, we have an interesting transit point where Saudi Arabia ships a large amount of oil to each month, and that’s across the water in Egypt. The location is called Ain Sokhna and the storage facility is called the SUMED, short of Suez-Mediterranean. There is close to 40 million barrels of storage tank capacity here which in turn connects by pipeline across the country to the Mediterranean Sea. At the port of Sidi Kerir along the Med Sea, there’s over 30 million barrels of storage capacity there. The reason such as setup exists is because fully laden VLCC supertankers (2 million barrels each) sit too deep in the water when carrying all 2 million barrels. They have to unload roughly half of their oil cargo via the SUMED at Ain Sokhna when sailing north through the Suez Canal, or unload at Sidi Kerir when sailing south through the canal. Once they reach the other side, they pick up the other half of their cargo and continue their journey. Outside of the SUMED, Saudi Arabia also keeps storage at the Motiva refinery in Port Arthur, Texas as well as Okinawa, Japan and Rotterdam, Netherlands. The facility in Ain Sokhna however, is the largest; and we have seen it entirely full during Q2 of this year. The most interesting thing about it however, is that a lot of the oil deliveries that reach the SUMED are done so in a cloaked manner. Vessels depart Saudi Arabia without keeping their AIS transponders on all the way, or report being empty when they’re in fact full. We observe this continuously. The significance of this is that since Exports are one of the data metrics in calculating Production, our numbers tend to average somewhat higher than general consensus as a result.