The fleet of Very Large Crude Carriers (VLCC)’s that number around 20, which are estimated to be carrying 50 million barrels of oil, has stirred up a controversy in the United States. In an already flooded market with logistical constraints, the question of where the incoming oil will go has dominated the headlines recently. Calls from U.S. senators for the application of import tariffs against the Saudi Arabian oil has been gaining traction amongst the mainstream media but as moderate of a measure it may seem, the inner workings of where the case may go create a different picture.
Firstly, with no official confirmation as to whether the oil has already been sold or not to designated buyers, the tankers are currently heading towards the Gulf of Mexico. Within the GoM is situated the Motiva Refinery, the largest of its kind and one of the most complex and flexible facilities in the region.
Motiva is one of the largest processors of crude in the area and has a competitive edge when it comes to petroleum products. The proposed tariffs would indirectly negatively impact the U.S. refiners because Motiva is situated in the Texas Port Arthur Free Trade Zone (FTZ). In the FTZ, the oil would not be subject to any customs fees/tariffs, and the oil could be unloaded at the port, processed, and then shipped out to regions where the other GoM refiners have their target markets in. With the added advantage of Motiva’s flexibility, the other refiners in the region would be at a significant disadvantage in cost terms. They could risk being driven out in the short time.
The case Saudi’s seem to want to make here is to have the oil in the shore sitting in the VLCC’s and unloading them as demand generates where they would be offsetting any bids from the onshore producers. This would significantly bottleneck the U.S. shale flow towards the refineries and create a massive backlog. Also at this point, it is highly unlikely that the Motiva refinery might be pulled off production for maintenance because the oil demand it would remove the market would be significantly less impactful than having it process and push for lower prices with added constant supply from the fleet sitting on the shore if hurting the American oil industry is their aim.
An interesting detail in the region is the Big Hill Strategic Petroleum Reserve. The SPR had received FTZ status in 1998, and depending on the negotiations between the U.S. and Saudi Arabia, if the price or the outcome is justifiable enough, some of the oil on the fleet could be used to fill the SPR’S to prevent any immediate shock to the market.
The unofficial statements also mention that some of the oil on the fleet has already been sold to U.S. refiners, including Exxon Mobil, Marathon Petroleum and Phillips 66. At this point, it seems likely that the application of tariffs against the Saudi oil imports would hurt the U.S. more than it benefits while also potentially knocking out the oil and gas jobs in the region.
Whatever the outcome may be, the Saudi fleet is unlikely to turn back unless a special accord is reached between the U.S. and Saudi Arabia. It will likely exert added pressure in the upcoming days on the U.S. market and should yield an interesting result in terms of balancing the current erratic market movements.