(Bloomberg) – Saudi Arabia has started reducing oil production as the crucial Strait of Hormuz chokepoint remains at a near-standstill, even as the kingdom rushes to boosts exports through an alternative route.
Map of the Strait of Hormuz. (Map Source: Global Energy Infrastructure.)
The information on the Saudi cuts, which comes from a person familiar with the operations, follows reductions by other OPEC nations including the United Arab Emirates, Kuwait and Iraq. Analysts estimate Saudi Arabia has larger storage capacity than some of its neighbors, indicating the kingdom may be pre-emptively lowering output to keep oil fields running for longer without having to completely shut them down.
State-run Saudi Aramco declined to comment.
The oil-market’s worst fears have been realized this month as the war in the Middle East all-but closed Hormuz to shipping, forcing a swathe of massive projects to lower output and causing oil prices to surge above $100 a barrel. It’s thrown supply chains into chaos, and the longer the hostilities continue bigger the risks of a spike in global inflation.
Saudi Arabia produces about 10 MMbpd of oil and exports about 7 MMbbl a day. Aramco has been diverting some of those shipments away from its usual Hormuz route toward Yanbu in the Red Sea. But the pipeline that carries those volumes has capacity to transport 5 MMbpd, which isn’t enough to fully replace the export volumes.
JPMorgan Chase & Co. had earlier estimated that Saudi Arabia would exhaust its oil and fuel storage capacity in over two months from the start of the conflict. In comparison, Iraq would reach that point in about a week and Kuwait in two. Both of those countries also started reducing output earlier than those timelines.
See also: Only Iran-linked vessels transiting Strait of Hormuz amid shipping halt
In theory, the Arab producers around the Persian Gulf — including Saudi Arabia, the UAE, Kuwait, and Iraq — collectively have just over 100 MMbbl of storage capacity left, or about a third of their total, according to Antoine Halff, co-founder and chief analyst of geospatial analytics company Kayrros.
But the effective level will in practice be lower, and in any case operational usage rarely exceeds 80% of nameplate levels, he said in a post on LinkedIn last week.
Saudi Aramco also made a rare move to offer some supply via a series of tenders for immediate delivery, some of which were from a supertanker near Taiwan. The company typically only offers supply under long-term contracts. It’s one of many signs that producers are taking unusual steps to keep the oil market supplied.
Separately, one oil tanker, carrying Saudi oil, appears to have transited the Strait of Hormuz with its satellite signal switched off in recent days. It’s among the first major vessels to cross, though the overwhelming majority of shipowners remain reluctant to do so.
