(Reuters) - U.S. crude exports are set to plunge by about 1 million barrels per day (bpd) in April and May, sources at the biggest merchants in the country said on Friday, as Saudi Arabia floods the market with discounted oil.
Saudi Arabia is selling oil for as little as $25 per barrel and has chartered about half a dozen supertankers to ship up to 12 million barrels of crude to the U.S. Gulf Coast, as it escalates its fight with Russia for global market share.
Oil prices posted their largest weekly percentage losses since the 2008 financial crisis as the coronavirus pandemic rocked the world economy. Saudi Arabia has stepped up efforts to boost exports following the breakdown of its agreement with Russia and other oil producers to limit supply.
Merchants at three exporters said U.S. crude shipments would be pinched due to Saudi Arabian discounts. The United States is one of the world’s fastest-growing oil exporters, recently shipping more than 4 million bpd, after ending a four-decade ban on crude exports in late 2015.
The U.S. export gains came as Saudi Arabia, Russia and others gave up market share through supply-cut agreements to keep prices higher.
Saudi Arabia has provisionally chartered more than 30 tankers to send oil worldwide to customers at discounted rates, particularly to big buyers like India and China that buy from exporters like the United States and Russia.
The favorable economics for shipping U.S. crude to the world have virtually disappeared as U.S. crude’s discount to Brent narrowed to under $1 a barrel on Friday, the smallest since late 2016. Brent, as an international benchmark, is affected more by changes in world supply.
“Exports are going to dry up until the Brent premium widens again. Buyers won’t pay more for U.S. crude than for Saudi or other producer barrels,” said Sandy Fielden, director of oil and products research, Morningstar in Austin, Texas.
“The rubber hits the road in April/May when Saudi barrels are on the water and U.S. sellers will have to compete on price or hold in storage.”
Trading for April is winding down, meaning much of the drop in exports will come in May, traders said, adding that inventories are likely to swell as exports drop.
“This market is over supplied by 5 million bpd and getting worse here,” one source at a global merchant said.
Export economics have also been pressured by soaring rates for tankers due to Saudi ramping up bookings.
“I expect a sizable drop on April export barrels, which will go to onshore storage,” another source at a merchant said.
Prices of the most popular sour crude grades in the Americas are particularly hard hit while Latin American crudes that found a home in the United States are now getting orphaned, traders said.
Spot prices of Mars crude, considered the sour crude benchmark in the U.S. Gulf Coast and one of the most popular export grades, fell to the weakest level since July 2018 and discounts for Latin American grades against benchmark Brent have doubled since mid-February.
Another popular U.S. export grade - WTI at East Houston, known as MEH, has also slumped to the weakest since July 2018.
Latin American crude flows are also in danger, as their exports to the United States have climbed as OPEC cut supply and Venezuelan shipments stalled due to U.S. sanctions.
Venezuela’s state-run PDVSA is this week offering discounts of up to $23 per barrel on its flagship heavy crude, traders said. [LINK]
“Latam crude prices are falling like a rock,” one trader said. “Price pressure coming from Arab Gulf’s grades (Iraq, Saudi Arabia, Qatar and Kuwait) is growing, and the price war between Russians and Saudis is creating chaos.”
Reporting by Devika Krishna Kumar in New York; additional reporting by Marianna Parraga in Mexico City; Editing by Chizu Nomiyama, Richard Chang and David Gregorio