Crude oil prices hit a five-week low Wednesday as OPEC production rose and U.S. inventories showed smaller than expected draws. OPEC has been trying to bolster oil prices with a production cut deal, but increased output from Libya and Nigeria, both of which are exempt from the deal, has continued to put downward pressure on oil prices. With production cuts failing to push prices higher, OPEC's de facto leader, Saudi Arabia, is now targeting the second piece of the equation - U.S. inventories.
U.S. inventory data is one of the most visible and readily available sources of on how much oil is in storage making it a number markets watch closely.
Saudi Arabia, which owns a refinery on the U.S. Gulf Coast, plans to cut exports to the United States in July. That reduction of oil into the country could show up as a bullish sign in the U.S. data, and contribute to faster drawdowns in storage.
"I think their next plan of attack is to drop exports to the U.S. so they can manufacture a drop in the EIA report," said John Kilduff of Again Capital. "It will make it look like inventories are really coming down."
(Click to enlarge)
Kilduff estimates that the kingdom could reduce exports to the U.S. by 100 to 250 MBOPD. The lower exports from Saudi Arabia would reduce total crude imports by 2 percent at their midpoint.
"The Saudis understand the importance of changing optics in the U.S. and are following it up by continuing to signal that they are going to reduce shipments into the U.S.," said Helima Croft, global head of commodities strategy at RBC. She said Saudi Arabia's energy minister has made clear that reducing U.S. shipments was an option.
Saudi Arabia reducing exports to Asian markets as well
The U.S. is not the only country to which Saudi Arabia plans to reduce exports, however. On Monday, sources indicated that OPEC's largest producer planned to reduce supplies to at least five Asian buyers as well. State-run Saudi Aramco plans to cut supplies to India in July by nearly 200 MBOPD while reducing crude flows to China by about 110 MBOPD. Related: Big Oil Opposes Trump's Budget Plans
Saudi Arabia has reduced exports to other parts of the world in the past, but it has avoided cutting supplies to Asian markets. OPEC's decision to protect market share in late-2014 was driven largely by the hope that it would continue to hold a dominant role in supplying energy to those same markets, but with the shift in focus back toward price, even Asian markets are now facing the possibility of fewer barrels.
"It's a good time to reduce because they're going into seasonal domestic demand swings," said Croft. Saudi Arabia uses more oil domestically during the summer months for its utilities.
Peak power demand in Saudi Arabia comes in the summer months when temperatures can reach as high as 122 degrees Fahrenheit (50 degrees Celsius). The intense heat leads to a spike in air conditioning usage which in turn leads to Saudi Arabia holding on to more of its oil in order to power its electrical grid.
By Oil And Gas 360
More Top Reads From Oilprice.com:
From our headquarters in Denver, Colorado, Oil & Gas 360® writes in-depth daily coverage of the North American and global oil and gas industry for… More