Trump can’t save oil prices with Saudi import ban

Banning imports of crude oilfrom Saudi Arabia is justthe sort of gesture that might appeal toU.S. President Donald Trump, who has vowed to protect jobs in the U.S. shale patch. But such a move wouldn’tdo much to reverse the decline inprices that has seen the Maycontract for West Texas oil fall below zero.

As we speak, there is a small armada of ships full of Saudi crude heading to the U.S.Most of it isscheduled to arrive next month, when storage space is expected to be near full and refiners are highly unlikely to be ramping up processing rates. Bloomberg has identified 20 very large crude carriers, known in the industry asVLCCs, that loaded since the beginning of March, each hauling about 2 million barrels of the kingdom’s crude toward American ports on the Gulfand West coasts. They aredue to arrive by the end of May.Several more that aren’t showing a destinationcould be heading the same way.

It's not immediately clear who now owns most of the Saudi crude on those tankers. Traditionallythe kingdomsells its oilat itsexport terminals, meaning that any ban would hit the American refiners who've purchased the cargoes, rather than the Saudis.

However, four of the ships that loaded in March are owned by the National Shipping Company of Saudi Arabia, known as Bahri, while eight out of the 10 vessels that have sailed so far in April were chartered by the same company. Thatsuggests that at least some of the crude may not have been sold before it left Saudi Arabia, making it a prime target for import tariffs or an outright ban.

Itjust won’t make much of a difference whetherthat oil is sold on American shoreswhen it finallyarrives, or whether it’sforced to go someplace else, where it will complete with U.S. exports. That’s because the gushing oil glut and dramatic evaporation of demand in a world under lockdownis happening right here and now. And oil prices are responding.

Yes, Saudi Arabiaand other OPEC countriesare coming under pressure to bring forward their recent, much-laudedoutput cuts. But for nowtheyaren't due to come into effect until the start of May. And they are starting to lookless impressive every day that passes.

The dealreached on April12 after a four-daystandoff called for a reduction ofa combined 9.7 million barrels a day from baselinesmostly reflecting October 2018 production levels. Thereference point is crucial because a lot has changed in the 18 months since then, and particularly in the last monthsince the previous OPEC output deal collapsed. In that time,Saudi Arabia and its closest neighborsembarked on a production surge. The kingdom has boosted output by more than 2.5 million barrels a day since February to 12.3 million barrels a day, according to its state-owned oil company Saudi Aramco. The United Arab Emiratesis pumping 4.1 million barrels a day, up by around one-third from February, according to the country’s energy minister, Suhail Al-Mazrouei. Kuwait has raised its production by a more modest 500,000 barrels a day, according to the International Energy Agency.

There is no sign of that surge ending any earlier than May. Until then, all three countries appear to be planning tocontinueto pump as much as they can.Bringing the cuts forward, even bythe 10 days remaining in April, would remove about 127 million barrels of potential oversupply from the market. That’s more thanone and a half times the storage space left in the U.S.’s Strategic Petroleum Reserve, which Trump is so eager to fill up at such a good price.

Advancing thecutscreates its own problems, though. The producers have contractual obligations to deliver that crude —or at least the portionthey aren't going toputinto storage tanks. And since everyone slashed their prices for April shipments in order to secure buyers, it’s likely that most of this month’s shipments have been sold.

Pan out, and you’ll see thatOPEC countries are facing exactly the same market pressures as oil producers in Texas.Demand has collapsed everywhere. Although it was hyped as a voluntary output cut, theOPEC deal was really just as much a reaction to market forces as what we’re seeing in Texas or North Dakota, albeit an attempt to do it in a slightly more orderly way.

The collapse in the WTI price to negative territory is the market's way of telling producers everywhere:Just stop pumping!