Gulf Oil Giants Deepen Cuts

Oil supply cuts in the Middle East are deepening, shaving about 6% off global output, as the effective closure of the Strait of Hormuz piles more pressure on producers with every day the Iran war goes on.

Production cuts are rippling across the Gulf even as Saudi Arabia and the United Arab Emirates ramp up exports through alternative routes to bypass Hormuz, with Saudi shipments through the Red Sea reaching a record this week. However, storage facilities are still filling up across the region and some producers are also preemptively curtailing output to delay the point at which they’d be forced to stop completely, according to a person familiar with the matter.

President Donald Trump said on Monday that the US and Israel were making significant progress in their war on Iran and could end the conflict “very soon,” causing oil prices to slump. But with the war now in its 11th day, there’s urgent pressure to get the waterway back to normal so that exports can start leaving Persian Gulf again.

“While we have faced disruptions in the past, this one by far is the biggest crisis the region’s oil and gas industry has faced,” Amin Nasser, the chief executive officer of Saudi Aramco, said during a conference call. 

Saudi Arabia, Iraq, the United Arab Emirates and Kuwait have lowered their collective output by as much as 6.7 million barrels a day, people with knowledge of the matter said, asking not to be identified discussing confidential information. 

The cutbacks are the most tangible supply response yet since the war started. It means they’ve reduced their collective production by as much as a third. 

Beyond oil field output, the war has shuttered refineries, halted production at Qatar’s liquefied natural gas plant, the world’s largest, and driven surge in global fuel prices and oil transportation costs.

The chaos and shutdowns drove oil toward $120 a barrel on Monday, though prices tumbled back down again after Trump’s comments on the possibility the war will end soon. Brent futures slumped a further 7% to $92 a barrel on Tuesday morning in London.

Saudi Arabia has lowered output by 2 million to 2.5 million barrels a day, the United Arab Emirates by 500,000 to 800,000 barrels a day, Kuwait by about half a million a day and Iraq by about 2.9 million a day, the people said.

Hormuz Bypasses

The kingdom is diverting millions of barrels to its export terminals on its Red Sea coast, allowing the kingdom to avoid the worst of the Hormuz crunch. The UAE, which has a bypass pipeline of its own, is also switching barrels away from the waterway.

The US has responded to the situation by allowing India to buy sanctioned oil from Russia, freeing up supply that had got blocked. It also announced a $20 billion reinsurance program for vessels navigating Hormuz. 

But so far the chokepoint, normally a conduit for a fifth of the world’s oil and a similar portion of liquefied natural gas, remains effectively closed.

The resulting crunch is rippling across the global economy with queues at filling stations in Asia and diesel and jet fuel prices soaring worldwide.

“The disruption has caused a severe chain reaction in not only shipping and insurance but there’s also a drastic domino effect on aviation, agriculture, automotive and other industries,” Nasser said. “There would be catastrophic consequences for the world’s oil markets the longer the disruption goes on, and the more drastic the consequences for the global economy.”

He declined to comment on Saudi Arabia’s output levels on the call.

Proportionately, Iraq has forced into the deepest cuts at almost 60%. Saudi Arabia’s, the UAE’s and Kuwait’s reductions all represent about 20% to 25% of their February output levels, according to data compiled by Bloomberg.

“With the current geopolitical crisis, global inventories, which are already at a five-year low, would see drawdowns at a faster rate,” Nasser said. “Global spare capacity is mostly concentrated in this region so it’s absolutely critical that shipping resumes in the Straits of Hormuz.”

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