According to multiple ship-tracking data services such as Llyod's List and Tanker Trackers, there are between 40 and 50 million barrels (bbl) of Saudi Arabian crude en route to the US at the moment. As such, US crude imports are set to surge in May. Although this level of imports seems unfathomable amid the current rout in US crude prices, it may actually be a welcome development for both US crude producers and oil refiners.
Lloyd's List Intelligence projects that US imports of Saudi Arabian crude will rise to nearly 1.2 million barrels per day (bpd) in May as a flotilla of laden very large crude carriers (VLCCs) arrives on US shores. If realized, according to US Energy Information Association (EIA) data, this would put US imports of Saudi crude at their highest since February 2017. For reference, the EIA's most recent monthly data, for the month of January, show US imports of Saudi crude at just 401,000 bpd. Last May, the US imported just 452,000 bpd of Saudi crude.
Although on the surface it seems absurd that imports of Saudi crude would spike even as the US crude benchmark sinks into negative territory amid oversupply, this development may be welcomed by both US producers and refiners. For producers, empty VLCCs are the key to ramping up export volumes. VLCCs are largely the only vessel used to ship US crude to Asia, and with high freight rates a VLCC arriving in the US Gulf Coast is unlikely to leave and travel back to the Arab Gulf empty.
The ships arriving to offload Saudi crude will then either be used as floating storage for US crude or as a means to get US crude to places such as South Korea, Japan, China, and Singapore. Either way, they will serve as an outlet for volumes that will no longer need to find a home in onshore storage.
As for US refiners, the buyers of the soon-to-be-delivered crude certainly saw multiple reasons to book these deliveries. First, refiners were likely persuaded by Saudi Aramco’s slashing of their official selling price (OSP) for April. Aramco cut the April OSP of its Arab Light crude to the US to a discount of $3.75 per bbl versus the Argus Sour Crude Index, down $7 per bbl from March.
Secondly, with diesel refining margins far stronger than those of gasoline, US refiners will benefit from running a heavier barrel of crude, which yields higher volumes of diesel. Arab Light Saudi crude, with an American Petroleum Institute (API) gravity of 34, is heavier and far more sulfur rich compared to the majority of the West Texas shale production, which has an API gravity of around 42 (the higher the rating, the lighter the crude).
On net, this development could counterintuitively mean lower crude stock builds than would have otherwise been possible as ships are refilled with US grades and since US refiners have a greater incentive to refine crude when margins are higher. Given that US market participants booked the cargoes knowing their desired refining slate and available onshore storage capacity, efforts by policymakers to prevent these imports from coming onshore could not only eliminate a needed export outlet for US crude, but could also weigh on refinery run rates in the US, exacerbating builds in crude storage. Market prices continue to be the best coordinator of the oil supply chain and efforts to intervene in this supply chain are likely to cause greater harm than good.
