Harvey Makes Landfall in Saudi Arabia, Muddying Waters: Gadfly

Harvey Makes Landfall in Saudi Arabia, Muddying Waters: Gadfly
Saudi Arabia has explicitly targeted the US in its strategy to drain the crude oil glut.

(Bloomberg Gadfly) -- Hurricane Harvey has devastated the Gulf Coast, and its impact is now spreading out to the rest of the U.S., chiefly at gas pumps.

But America's resurgent role in the global energy trade means the ripples extend far beyond its own shores. One place they are lapping onto is Saudi Arabia.

In theory, the de-facto leader of efforts by OPEC, Russia and other members of the so-called Vienna Group stands to gain from disruption at the nerve center of the shale boom that has helped to suppress oil prices. In practice, things are a bit more complicated.

As I wrote here, the shale boom has moved a lot of U.S. oil production inland and contributed to a glut of barrels building up in storage. So Harvey's biggest impact on the region's energy industry has been the closure of ports, refineries and pipelines -- and keeping many drivers off highways that have turned into lakes and streams.

The net result is depressed demand for crude oil due to absent refiners and panic buying of refined products such as gasoline for the same reason.

So even as Saudi Arabia sees prices of the end products of its industry spiking, by and large it is not capturing that windfall for itself:

The disruption should cause U.S. inventories of refined products to fall as they are used to cover shortages and stocks of crude oil and products to drop elsewhere as, for example, European refiners run flat-out to send fuel to the U.S. to capture higher prices. This ultimately helps Saudi Arabia.

Again, though, there's a complicating factor.

Saudi Arabia has explicitly targeted the U.S. in its strategy to drain the glut; shipments of its oil to America have dropped noticeably this summer:

That's partly because, unlike in much of the rest of the world, America's inventories are laid out in a detailed government report every week. So clearing those offers the best way to show Saudi Arabia's strategy is working.

And Gulf Coast refineries are geared toward processing heavier grades of crude oil, such as those from Mexico, Venezuela -- and Saudi Arabia. This potentially gives Saudi Arabia some leverage, says energy economist Philip Verleger. If it can squeeze the supply of those barrels refiners crave the most, then bids should rise, not just in America but Asia, too.

There has been some evidence this approach is working:

Now along comes Harvey.

As of Thursday evening, a sixth of U.S. refining capacity was still shut down completely, but reports of imminent re-openings have been a constant feature on newswires and Twitter feeds for days. Ports have been closed to both imports and exports of barrels. The impact on demand is unknown but believed to be large, given Houston's size and driving habits. Meanwhile, shale production has been hit to some degree -- particularly in the Eagle Ford basin in south Texas -- but the scale and duration of outages are again unknown at this point.


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