(John Kemp is a Reuters market analyst. The views expressed are
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By John Kemp
LONDON, March 23 Saudi Arabia faces a difficult
balancing act as it tries to work down excess global crude
stocks while protecting relationships with important refining
customers in the United States and Asia.
Saudi Aramco exports most of its crude direct to refiners
under long-term contracts that prohibit resale to other refiners
or independent traders.
Aramco's business has been built around nurturing strategic
relationships with customers and emphasising its reliability as
The model is very different from most other OPEC and
non-OPEC producers that rely more heavily on spot sales to
refiners and traders.
Aramco's strategic relationships and term contracts help it
realise value in the long run but reduce its flexibility in the
And Saudi Arabia's commitment to reduce production under the
accord with other OPEC and non-OPEC countries reached towards
the end of 2016 creates a tension with its customer-focused
The kingdom has an obvious interest in reducing excessive
global crude stockpiles in an attempt to push oil prices higher.
In fact, Aramco has so far cut production even more than
required under the OPEC/non-OPEC agreement to accelerate the
But Aramco is also keen to protect is preferential-supplier
status with refiners across Asia and the United States which
means protecting volumes as far as possible.
Contracts with refiners contain some limited flexibility to
vary the volume supplied each month which allows for some
But Saudi Arabia does not want to cut its own supply if the
shortfall will simply be made up by increases from other
exporters producing similar crude oils.
Iran, Iraq, Oman and Russia all produce medium and heavy
sour crudes with similar characteristics to Saudi crude.
For that reason, the kingdom insisted they were all bound by
production limits in the OPEC/non-OPEC agreement.
But even with the OPEC/non-OPEC agreement, it is still
difficult to cut exports without leaving important customers
disappointed and looking for alternatives.
PRODUCTION AND SUPPLY
The challenge is how to cut output without reducing exports
One option is to cut domestic consumption, which the kingdom
has been doing by increasing gas production and reducing crude
consumption in its power plants.
The problem is that a reduction in direct domestic crude
consumption is equivalent to an increase in global oil supply
and makes the rebalancing process slower.
Another option is to run down domestic crude stockpiles,
though that is obviously unsustainable in the long term.
Saudi Arabia cut production by 482,000 barrels per day (bpd)
in January 2017 compared with the same month a year earlier,
according to government figures supplied to the Joint
Organisations Data Initiative (tmsnrt.rs/2ng9CcM).
But exports were cut by only 122,000 bpd compared with the
same month in 2016, according to JODI data, which is likely one
reason that OECD crude stocks have been slow to fall (tmsnrt.rs/2ngaGh2).
Direct crude consumption by the power sector fell by around
40,000 bpd while refinery intake was reduced by around 340,000
Even so, domestic crude stocks fell by almost 11 million
barrels in January. Stocks have fallen in 13 of the last 14
months by a total of 67 million barrels as exports and domestic
consumption have outstripped production
The drawdown in January was the second-largest in the last
five years and was obviously unsustainable for any length of
In response, the kingdom boosted production by 263,000 bpd
in February, which left output just 209,000 bpd below
year-earlier levels, according to government data supplied
directly to OPEC.
But the independent assessors surveyed by OPEC reported
output declined by a further 90,000 bpd, a discrepancy that
prompted the Saudi energy ministry to issue a rare
"The difference between what the market observers as
production, and the actual supply levels in any given month, is
due to operational factors that are influenced by storage
adjustments and other month to month variables."
Saudi Arabia expects its crude oil supply to be stable at
around 10 million barrels per day in the next few months, fully
in line with the country's OPEC quota and regardless of possible
fluctuations in monthly production, industry sources told
Reuters on Thursday.
SUMMER EXPORT LEVELS
Saudi Arabia's internal consumption is set to rise
significantly in the months ahead as its refineries complete
scheduled maintenance and direct crude burn in the power sector
increases in the summer months.
If production remains unchanged, the volume available for
export should decline during the second and third quarters of
2017, which would help drain global crude stocks and tighten the
Many oil traders have been assuming a sharp drop in Saudi
exports, which is one reason why calendar spreads from June
onwards have narrowed significantly.
But any reduction in exports would leave refiners in Asia
and the U.S. Gulf Coast short of feedstock and hunting for
Russian and other Gulf crudes to fill the gap.
Rising domestic crude consumption will sharpen the tension
between Saudi Arabia's price-management and
It will also test the newfound solidarity among OPEC and
non-OPEC producers as they try to coordinate to drain stockpiles
while also competing to protect market shares.
(Editing by David Evans)