Saudi Arabia Begins Oil Output Cuts as Storage Fills Up
Speakers
Summary
- Saudi Arabia has begun cutting oil output because domestic storage facilities are reaching maximum capacity.
- The Strait of Hormuz is effectively shut, trapping millions of barrels of oil that cannot reach global markets.
- Saudi Aramco typically exports 7 million barrels per day, but alternative routes like the East-West pipeline can only accommodate up to 5 million barrels per day.
- Additional security threats in the Red Sea from Houthi rebels are further complicating shipping routes.
- The production halts are due to logistical bottlenecks and full storage, not physical damage to oil infrastructure.
- A prolonged closure of these chokepoints will result in a severe, physical reduction in global oil supply.
Trade Ideas
Aramco produces around 10 million barrels a day. Around 7 million barrels a day are slated for export. The east west pipeline can accommodate up to 5 million barrels a day. If Saudi Arabia and other OPEC producers cannot export their full capacity due to the Strait of Hormuz and Red Sea blockades, global buyers will be forced to secure energy from non-Middle Eastern sources. US domestic producers and supermajors will capture this market share while simultaneously benefiting from elevated global crude prices. Long US energy equities as they benefit from a localized Middle East supply shock without suffering the export disruptions themselves. A sudden diplomatic de-escalation in the Middle East that restores OPEC supply, or US regulatory actions that restrict domestic energy exports.
There's an additional concern to think about on the Red Sea as well, in case the Houthis also get involved in this and start once again targeting ships and vessels passing through the Red Sea. The closure of the Strait of Hormuz and the avoidance of the Red Sea forces the global shipping fleet to take massive detours, such as sailing around the Cape of Good Hope. This drastically increases ton-mile demand, tying up vessel capacity for longer periods and causing freight rates for oil tankers to skyrocket. Long oil tanker equities as geopolitical chokepoint closures create a massive supply-demand imbalance in shipping capacity, driving up day rates. International naval interventions successfully secure the shipping lanes, allowing normal traffic to resume and crashing freight rates.
The longer the situation persists, the more obviously you're going to see an impact, a real physical impact on oil supply. With the Strait of Hormuz shut and Saudi Arabia forced to cut production because their storage is full, millions of barrels per day are removed from the global market. This physical supply deficit will force global crude prices higher as buyers scramble for available barrels. Long crude oil via USO to capture the price appreciation resulting from the Middle East export bottleneck. The Strait of Hormuz reopens quickly, or a severe global macroeconomic recession destroys oil demand, offsetting the supply cuts.
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