Saudi Arabia Oil Sales to U.S. Imperiled by Shale Boom

After years of keeping the price of crude sold to the U.S. low enough to maintain market share, Saudi Arabia is losing ground as the shale boom leaves U.S. refiners with ample supplies of inexpensive domestic oil.

Arab Light crude for sale in the U.S. averaged 48 cents a barrel less than Light Louisiana Sweet, a Gulf Coast benchmark, in August, the narrowest discount in data compiled by Bloomberg back to 1991. The U.S. imported 878,000 barrels of Saudi crude a day in the first four weeks of August, the least since 2009.

Shale drilling has boosted U.S. oil output to the highest level since 1986. As refineries turn to lower-priced domestic oil to make fuel at a record pace, the Saudis and other foreign suppliers are left with dwindling slices of the market. In June, imports from Saudi Arabia accounted for the smallest share of crude processed at U.S. refineries since February 2010.

“The Saudis are not going to sell crude at a disadvantage to themselves — they’re not about buying market share anymore,” Mike Wittner, Societe Generale’s head of oil market research in New York, said by telephone Aug. 28. “Those days are long gone. They’ll price crude to be competitive with the competing sour grades in every market, and if that means their flows to the U.S. are down, so be it.”

Saudi Oil Minister Ali al-Naimi told reporters in Vienna in December that he expected Saudi shipments to the U.S. to stabilize at an average of 1.4 million to 1.5 million barrels a day this year. Saudi Arabian officials didn’t return at least nine calls between Aug. 28 and yesterday seeking comment on the exports.

Saudi Refineries

Saudi Arabian Oil Co. shares ownership with Royal Dutch Shell Plc of three refineries on the U.S. Gulf Coast, including a 600,000-barrel-a-day plant in Port Arthur, Texas, the largest in the U.S. The refineries, which have combined capacity of 1.07 million barrels a day, imported 331,000 barrels a day from Saudi Arabia in June.

Until recent months, the kingdom maintained a steady flow to the U.S. around 1.3 million barrels a day even as total U.S. imports fell by 34 percent from a peak in June 2005. Other countries didn’t fare as well. Shipments are 59 percent below their peak from Mexico, 56 percent from Venezuela and 93 percent from Nigeria.

Imports are being pushed out by domestic production that’s risen 65 percent in the past five years, spurred by horizontal drilling and hydraulic fracturing in underground layers of shale rock. Growing pipeline deliveries of heavy crude from Canada also displaced waterborne cargoes from abroad.

The price of West Texas Intermediate crude averaged $96.08 a barrel in August, compared with $106.54 the same month the year before. It traded at $95.37 at 12:23 p.m. in London today.

Market Share

“The Saudis might fully intend to stay in the U.S. market, they might fully intend to have a million-plus barrels, it’s just the market supply-and-demand levels probably won’t allow that,” said John Auers, executive vice president at energy consulting firm Turner Mason & Co.

Saudi Aramco, as the state oil company is known, bases prices for the different destinations on regional indexes, adjusting premiums and discounts to be competitive against oil from other countries.

In the U.S., Aramco’s adjustments kept the average price of Arab Light more than $2 a barrel below Light Louisiana Sweet every month until July. The contract fell as low as $96.04 last month, the lowest price this year.

Aramco was offering oil to the U.S. at a significant discount to prices in other regions. Arab Light to the U.S. was $5.64 a barrel less than to Asia in 2013, falling to a $22.64 discount in November. Saudi Arabia lost $2.6 billion by selling oil to the U.S. instead of Asia in 2013, Auers said.

Shifting Sales

“In some ways, it’s inevitable that Saudi Arabia realizes there are more attractive markets, and they’ll rotate away, supply their U.S. refineries with domestic grades and sell their crude at a premium to Asia,” Francisco Blanch, head of commodities research at Bank of America Corp. in New York, said by phone Aug. 29. “As the U.S. becomes a more balanced crude force in global markets, it’ll move toward lesser imports and become decreasingly attractive to foreign crude sellers.”

Saudi exports to the U.S. averaged 1.32 million barrels a day in 2013, the second-most of any country behind Canada. They reached 1.58 million in April, before dropping by almost half to average 878,000 over the first four weeks of August, according to U.S. Customs data compiled by Bloomberg.

The price changes and declining imports might just be a blip, Jason Bordoff, founding director of Columbia University’s Center on Global Energy Policy in New York, said by telephone Aug. 26. Saudi Arabia uses more crude domestically during summer months to generate power and meet increasing demand for air conditioning. Temperatures have been higher than normal.

Saudi Sales

“I’m not sure how much I’d read into a couple of weeks or even a couple of months of data,” Bordoff said. “Saudi imports have come down, but they’re still higher than what we saw in 2009.”

Shipments to the U.S. have fallen even as Saudi exports to the rest of the world have held steady. U.S. imports from Saudi Arabia fell by 562,000 barrels a day from April to June, more than the 506,000-barrel-a-day decline of total Saudi exports, according to the U.S. Energy Information Administration and Joint Oil Data Initiative, a database supervised by Riyadh-based International Energy Forum.

Saudi sales to Asia will become more important moving forward as demand for liquid fuels in the region is expected to grow 44 percent through 2035, while North American demand shrinks, according to BP Plc. In September China surpassed the U.S. as the world’s largest importer of crude oil and refined products.

The redirecting of supplies to other markets and the U.S.’s shrinking dependence on foreign oil will inevitably change American interest in international conflicts, Blanch said.

“It is perhaps the biggest question: Is the reduced commercial relationship between the U.S. and Saudi going to lead to lesser involvement of the U.S. in the Middle East?‘‘ said Blanch.

Bloomberg