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Analysis: US wants Middle East oil to offset Venezuela sanctions, but Saudi Arabia is cutting output

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OPEC cuts to undo last year's production surge

Saudis felt burned by US' Iran sanctions waivers

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London — The US is once again pressuring Saudi Arabia and its Gulf allies to boost crude supplies at the expense of another sanctioned OPEC member -- this time Venezuela.

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For now, however, the kingdom appears less inclined to answer the call as it did last year, when the US imposed sanctions on Iran.

Saudi Arabia, the world's largest crude exporter, has been steadily slashing its output to reverse last year's production surge. February production will come in below January's projected 10.2 million b/d, energy minister Khalid al-Falih has said -- some 900,000 b/d less than its record 11.1 million b/d in November.

But that was before the US on Monday imposed severe sanctions targeting Venezuela's state-owned oil company PDVSA, with officials saying they expect Saudi Arabia and other producers to make up for any crude shortfalls.

"I'm sure many of our friends in the Middle East will be happy to make up the supply as we push down Venezuela's supply," US Treasury Secretary Steven Mnuchin said.

The PDVSA sanctions could ultimately block about 500,000 b/d of US imports of Venezuelan crude, while also shutting off 120,000 b/d in US diluent exports to Venezuela. The loss of diluent would significantly inhibit PDVSA's ability to produce and market its extra heavy oil.

Venezuelan production stood at 1.17 million b/d in December, according to the latest Platts OPEC production survey, down 530,000 b/d in a year, a trend the sanctions would worsen.

A senior Saudi official told S&P Global Platts before the announcement that he was not aware of any request from the US for more Saudi crude, and sources indicated the kingdom would be unlikely to comply anyway, having been burned by the Iran sanctions waivers the US granted in November.

NEW OPEC CUTS

The US had leaned on Saudi Arabia and other Middle East OPEC members to raise their production last summer in anticipation of the reimposition of US sanctions aimed at zeroing out Iran's oil exports, and the kingdom complied, ramping up its output by more than 1 million b/d in six months and attributing the increase to customer requests.

But the US then caught OPEC off guard by issuing waivers to eight countries to continue purchasing Iranian oil, contributing to market fears of a supply glut and tanking prices over the past few months.

Stung by the decision and wary of tepid demand growth in 2019, Saudi Arabia pushed OPEC to implement new production cuts, and the group agreed with Russia and nine other non-OPEC allies to commit to 1.2 million b/d in supply curbs that went into force January 1.

Falih, in an interview Monday with Bloomberg Television before the PDVSA sanctions announcement, said Saudi Arabia would continue to target the US for the bulk of its output cuts. Falih has noted how much the EIA's weekly US petroleum inventories report can move the market, but he said the decision to shift flows from the US is as much a commercial one.

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"As we look at the oil market, and we see it in the price differentials, it's really not rewarding us to export a lot of oil to the US," Falih said. "And as a result, as we make adjustments, it makes commercial sense that that's the market that gets the majority of our cuts."

Saudi exports to the US have averaged 833,000 b/d over the four weeks ending January 18, according to the US Energy Information Administration, down from 1.05 million b/d in October.

IRAQ TO THE RESCUE?

A senior UAE official said his country, a close ally of Saudi Arabia as well as the US, also has not been asked by the US to raise its crude exports.

If not Saudi Arabia and the UAE, then the US may be able to turn to Iraq, which has boosted its exports and consistently flouted its OPEC production quota, to the irritation of other members.

With its need for higher revenues to rebuild following its devastating fight against the Islamic State militant group, Iraq could be a ready and willing supplier. Iraqi officials did not respond to requests for comment.

The country's crude exports from its federally controlled southern ports averaged 3.73 million b/d in December, an all-time high, according to its State Oil Marketing Organization, up from 3.52 million b/d in June.

US imports of Iraqi crude averaged 387,000 b/d for the four weeks ending January 18, according to the EIA, but in the last year were as high as 833,000 b/d in April.

-- Herman Wang, herman.wang@spglobal.com

-- Edited by Alisdair Bowles, newsdesk@spglobal.com