Saudi Arabia is considering rerouting millions of barrels of oil on board tankers sailing to the United States if President Donald Trump decides to block imports of crude from the kingdom, shipping and trade sources have told Reuters news agency.
Some 40 million barrels of Saudi oil are on their way to the US and due to arrive in the coming weeks, piling more pressure on markets already struggling to absorb a glut of stocks, according to shipping data and sources.
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US officials have said in recent days that Washington is considering blocking Saudi shipments of crude oil, or putting tariffs on those shipments, adding to difficulties for the cargoes now on the water.
Shipping sources said the kingdom had tried to seek storage options for the cargoes from tanker owners when the ships were chartered last month, but many pushed back given booming rates, that are feeding a desire not to tie up vessels.
Two sources said Saudi Arabia is looking into whether it could reroute the cargoes elsewhere if the US halts crude imports from the kingdom.
Saudi Arabia’s state oil company Saudi Aramco declined to comment.
Oil traders active in European and Asian markets said there was an expectation that the Saudis would look to divert the cargoes to other markets if a ban is imposed- a potential move that could put huge pressure on storage tanks in those two regions.
“Europe looks full, but surely if the Saudis offer it at really cheap levels, buyers would take it,” a source with an international trading firm said.
“Some still have storage spaces or may agree to float it for some time.”
A source at a separate oil trading firm active in Asia said they expected many of the barrels that were bound for the US to flow to the region if exports were blocked.
The slump in demand triggered by the novel coronavirus and the hunt for storage options had prompted the US to consider such action.
US senator Ted Cruz who represents the heavily oil-revenue dependent state of Texas said on Twitter on Tuesday: “My message to the Saudis: TURN THE TANKERS THE HELL AROUND.”
Shipping data showed 19 supertankers – each capable of carrying 2 million barrels of oil – were sailing to key US terminals, especially in the US Gulf.
Three separate tankers, also chartered by Saudi Arabia, are currently anchored outside US Gulf ports, the data showed.
“This could prove to be a very expensive exercise for Saudi Arabia as whatever happens with the cargoes and the tanker owners will need to be paid demurrage (for the ships) and those costs would have been locked in when the market was higher to secure the charters,” a shipping source said.
“While this is an expensive gamble for the Saudis, shutting off production would have been proved even more costly.”
Additional costs, known as demurrage, were estimated at $250,000 a day based on rates last month when a lot of vessels were booked.
Daily tanker rates soared to nearly $300,000 in the past month and though they have retreated to $150,000 a day this week, they are still significant and would be in addition to other costs including insurance if the ships are held up.
US refineries pullback
Refiners have been largely absent from oil markets in the US in recent days as they slash processing rates and as demand dries up in the wake of coronavirus lockdowns, physical oil market sources said.
“There is more reluctance now with fresh shipments as refiners in the US have no homes for the oil,” another shipping source said.
Marathon Petroleum, Exxon Mobil, Chevron and Phillips 66, among the biggest US buyers of Saudi crude, did not immediately respond to requests for comment.
Most of the large buyers of Saudi oil are along the West Coast. The region accounts for about half of all Saudi crude imports to the US, according to the Energy Information Administration (EIA). Storage there was already 65 percent full as of April 10.
The Gulf Coast is the second biggest destination in the US for Saudi oil, and storage there was about 55 percent full.
US crude futures crashed on Monday, with the front-month May contract, which expired on Tuesday, settling in negative territory at -$37.63 a barrel. That steep fall came as traders scrambled to get out of the contract to avoid taking delivery of barrels due to a lack of storage.
The imminent arrival of the cargoes comes at a time when the main US storage hub in Cushing, Oklahoma, the delivery point for West Texas Intermediate (WTI) crude, is expected to be full within weeks.
President Trump said on Monday he would “look at” possibly stopping Saudi shipments to the United States.
Last week, Frank Fannon, the US assistant secretary of state for energy resources, said tariffs were a possibility.