Saudi Arabia continues to keep the market informed about its stance on the OPEC production cut deal, with Khalid al-Falih's latest guidance that Saudi would prefer to overtighten the market than exit early from cuts (channeling Neil Young's 'it's better to burn out than fade away').
Al-Falih has gained a great deal of credibility over the last three-quarters of a year by outlining Saudi's next move in terms of exports, then following through on it. We should therefore take heed from his latest comments.
Al-Falih also signaled that the kingdom will continue to keep its crude exports in check next month, holding below 7 million barrels per day. This is no surprise, and will be their stance until at least the Saudi Aramco IPO.
We can see from our ClipperData that a good deal of OPEC's success in lowering OECD inventories has been by directing exports to emerging markets instead.
We've highlighted before that Saudi Arabia took about 100 million barrels off the global market last year via lower exports. The chart below highlights the change in emphasis from Saudi Arabia around June, when it started increasingly favoring sending crude to Asia, at the expense of North America.
This coincides with the strategy shift first outlined by Khalid al-Falih on May 25 last year, via his 'exports to the U.S. will drop measurably' declaration. (The start of his credit-building process). Related: Venezuela’s PDVSA Faces Mass Exodus Of Workforce
Export loadings bound for Asia in the last seven months of 2017 were up 380,000 bpd versus the October 2016 reference level, versus a drop of 325,000 bpd heading to North America.
Favoring sending crude to Asia was a double-whammy: not only are Asian inventories much more opaque, meaning barrels could be squirreled away out of sight, but sending crude east meant it kept crude out of OECD inventories. As for deliveries to the U.S., they were conspicuous by their absence, aiding inventory draws and adding to bullish sentiment:
(Click to enlarge)
We have also seen another trend emerge in the last year in conjunction with the oil production cut deal: that of higher Saudi Arabian middle distillate exports. We first highlighted in March of last year that Saudi Arabia could be supplementing its lost revenues from the OPEC oil production cut deal by exporting more products.
We can see from our ClipperData below that Saudi middle distillate exports outpaced year-ago levels in each of the last seven months of last year, by an average of 110,000 bpd over the period. This year has also started off strongly, well above January 2017's level.
While higher refining capacity in the kingdom could explain away this increase - as could higher demand (as we discussed earlier this week) - it is interesting that the increase in middle distillate exports last June coincided with change in strategy for crude exports.
By Matt Smith
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