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Get ready for angry Trump tweets as Saudi Arabia slashes oil output
THE list of things that US President Donald Trump criticises in his tweets varies from one day to the next. He may soon have to direct his ire to oil prices and the actions of his ally, Saudi Arabia, once again.
The desert kingdom is already making good on its promise to slash supply, and the initial evidence suggests that the biggest cut is being made in deliveries to the US.
On top of that, the price it charges American buyers of its crude has been raised to near record levels for cargoes to be shipped in February.
That could be bad news for a president who just celebrated falling gas prices. The Opec+ group of countries met in December and, after Russia took the reins, eventually agreed to cut supplies by 1.2 million barrels a day from January. For Saudi Arabia, that meant cutting production to just over 10.3 million, but it pledged to go further - oil minister Khalid Al-Falih told reporters and analysts that it would be slashed to 10.2 million barrels a day in January.
The first job was to unwind the output surge made in November that had helped to deliver the price drop hailed by Mr Trump. That was done last month. Saudi production in December was back below the October baseline used for its (and most other countries') promised cuts.
That couldn't have been what Mr Trump wanted, given what he tweeted the day before Opec began its meeting in Vienna - at the time, crude prices were in the midst of their worst quarterly decline in four years.
Bloomberg's tracking of crude exports from Saudi Arabia indicates that the biggest drop in flows from the kingdom was in the volume heading for the US. Shipments to ports on the Atlantic, Gulf and West coasts fell by nearly 60 per cent between November and December to just over 350,000 barrels a day. That's the lowest since Bloomberg started tracking these flows in January 2017.
The size of the drop isn't set in stone - a small number of ships signalling that they are heading for the Suez Canal or Singapore could eventually go to the US. Even so, a decline in Saudi crude shipments to American ports should start to show up in lower deliveries after about six weeks.
By mid-February, US imports of the kingdom's oil could fall to the lowest in more than 30 years, according to data from the Department of Energy. The last time the flow from Saudi to the US fell below half a million barrels a day was in the mid-1980s, after the kingdom slashed its production by 80 per cent over four years in an ultimately unsuccessful attempt to prop up oil prices.
It's not just this volume decline that is going to rile Mr Trump. The price of that oil isn't going to make him happy either. Saudi Arabia sets its crude prices a month in advance of it being loaded at its export terminals, so it has just published its price list for February. In common with other producers, it does not set an outright price, but rather a differential to regional benchmarks for each export grade and each market area.
Price differentials for US buyers have been going up since August and for most grades are now close to record levels. Saudi heavy crude, which is the closest alternative to dwindling supplies from Venezuela and Mexico, is the most expensive that it has been since 2009 in relative terms.
It makes sense for Saudi Arabia to focus its cuts on sales to the US, the only country that publishes detailed weekly data on oil imports and inventory levels - traders watch the reports closely.
This means the reductions will be evident more quickly than would similar cuts to other destinations, so a drop in American imports should have a much more immediate impact on price expectations.
There is no reason to doubt that Mr Al-Falih will do what he said in Vienna. It was only after slashing exports to the US in July 2017 that oil prices really began to recover, and Saudi Arabia will be hoping for a similar impact this time, too. But don't be surprised if that also unleashes angry tweets from the US president. BLOOMBERG