US oil imports from Saudi Arabia and Iraq, the US’s two main sources for crude imports, are the highest since late 2012. But this could soon change if the two major OPEC countries comply with the group’s November 30 output cut agreement. A reduction in production, coupled with the recent widening of price differences between US-produced Mars crude oil and Dubai/Oman crude oil, indicate that US imports from Saudi and Iraq are now becoming less attractive to US downstream players, according to a recent EIA report.
Late last year, high production in Saudi Arabia and Iraq, joined with seasonally low domestic demand in Saudi, contributed to record oil exports from Iraq and near-record exports from Saudi, according to the Joint Organizations Data Initiative (JODI). In November, Saudi oil exports hit 38.3 M/bpd, the highest since May 2003. In December, however, they declined to 8 M/bpd. The EIA noted that Saudi exports ordinarily rise from August to November because seasonal declines in domestic consumption increase availability of crude oil for export.
In Iraq, oil exports reached a record high of almost 4.1 M/bpd and remained at that level in December. JODI data show that both countries’ output levels were high before the OPEC production cuts took effect on January 1. Saudi’s December volumes were up 321,000 bpd while Iraq’s were up 700,000 bpd from year-ago levels, thus creating an opportunity to boost exports.
But nuance is important here. The EIA noted that although Saudi and Iraqi oil exports increase in November and December, transit times result in delays before these exports arrive in the US. It takes about seven weeks for these shipments to reach the US Gulf Coast from the Persian Gulf after travelling around the southern tip of Africa. The EIA notes that using a smaller vessel capable of going through Egypt’s Suez Canal, the voyage takes about five weeks. Traveling from the Persian Gulf to the US West Coast on a Trans-Pacific route takes six weeks.
Because of these transit times, exports from Saudi and Iraq in November and December would be expected to arrive in the US between December 2016 and February 2017. Oil imports from Saudi increased for five straight weeks, from 1 M/bpd for the week ending January 6 to 1.3 M/bpd for the week ending February 10. US imports from Iraq similarly grew for five consecutive weeks, rising from 373,000 bpd for the week ending December 9 to 723,000 bpd for the week ending January 13.
However, as noted at the outset, this trend is unlikely to continue given recent market developments noted by the EIA. First, the price differential between Dubai/Oman medium, sour grade oil, and Mars, a US crude oil with similar properties, was relatively low last year. This made medium and heavy crude oils from Saudi and Iraq more attractive to US refiners because they produced a profitable slate of finished products when processed in refineries. The Dubai/Oman oil serves as a benchmark price for similar grades of oil produced throughout the Middle East.
After OPEC announced its production cut agreement on November 30, the relative price of Dubai/Oman crude oil increased because the supply cuts pledged by OPEC’s producers disproportionately impacted medium, sour grades. In January, the price premium of Dubai/Oman over Mars reached its highest level in over a year, likely encouraging US downstream companies to process more domestic medium, sour barrels while reducing imports of comparable grades from the Middle East.
At the November OPEC meeting, member countries agreed to cut supply by around 1.2 M/bpd from an October baseline and lower OPEC’s production ceiling to 32.5 M/bpd beginning January 1. The EIA adjusted its December Short-Term Energy Outlook by reducing OPEC’s crude oil production by 100,000 bpd in the first quarter of 2017 to 32.8 M/bpd. As we noted a couple of weeks ago, so far it looks like OPEC’s members are complying with the deal, which is intended to last six months with an option to extend for an additional six months. That decision will likely be rendered at the group’s next gathering this summer.
Saudi Arabia agreed to make the largest production cuts (about 40% of the total) and reduce output by 486,000 bpd to 10.1 M/bpd. Meanwhile, Iraq, the United Arab Emirates, and Kuwait agreed to cut supply by 210,000 bpd, 139,000 bpd, and 131,000 bpd, respectively. But as we have noted, Iran, Libya and Nigeria were granted exemptions from the deal. Iran has been boosting oil production over the past year following the lifting of sanctions last January. Its current production is 3.8 M/bpd and it is aiming for 4 M/bpd. Nigeria and Libya were granted exemptions due to ongoing internecine strife that has cut oil production in recent years.
The implications of reduced Saudi and Iraqi oil imports to the US oil market remain to be seen, but with returning US supply, a favorable regulatory environment due to the Trump administration, and companies adjusting their 2017 plans from maintenance to growth, falling imports will only encourage US to advance toward its goal of energy independence.