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Saudi rift could bolster US oil, but energy dominance claims overstated: analysts

Houston — Saudi Arabia's veiled threat to weaponize its oil exports for the first time in a generation may prove to be a windfall for US oil producers, but could also undermine President Donald Trump's policy goal of US "energy dominance," despite claims from administration officials otherwise.

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Over the weekend, Trump promised "severe punishment" if the Saudis were responsible for the disappearance and alleged murder of journalist Jamal Khashoggi, which drew a threat of "greater action" from the Saudis.

Related story: Any US sanctions against Saudis likely to target individuals, not oil

The threat could place geopolitical risk on Saudi barrels for the first time since the early 1970s, according to John Auers, executive vice president at refinery consultants Turner, Mason & Co.

"They'll be seen as an unreliable supplier," Auers said, a list that currently includes Iran, Russia, Venezuela, Nigeria and Libya.

"US barrels, all of the sudden, become the best barrels out there," he said. "US oil producers would win."

But that win may not be apparent in the near term as midstream infrastructure constraints, particularly a lack of pipelines out of the Permian, may hinder much US oil export growth.

Permian oil production is expected to average about 3.55 million b/d in November, up 53,000 b/d from October and up 921,000 b/d from November 2017, the US Energy Information Administration reported Monday.

S&P Global Platts Analytics forecasts Permian production to grow to about 4.5 million b/d by the end of 2019 as midstream companies add about 3 million b/d of new pipeline takeaway capacity.

"The US would be seen as a reliable supplier, but given the way that oil is traded, I think that the constraint on more US exports is really infrastructure, it's not demand," said David Goldwyn, president of Goldwyn Global Strategies and a special envoy and coordinator for international energy affairs at the State Department during the Obama administration. "It would be painful for US producers to see this lost opportunity."

Analysts said Monday that a rift between the US and Saudis, whether it involves sanctions or new limits on production, would roil oil markets for years, increasing prices, reducing global demand and potentially hindering growth in the global economy.

On Sunday, Larry Kudlow, director of the White House's National Economic Council, downplayed the impact of a Saudi action on oil flows.

"The United States is the dominant energy player so we're in pretty good shape, in my opinion, with our energy boom to cover any shortfalls," Kudlow said, according to the Associated Press.

But US energy dominance can only go so far, analysts said.

"The reality that escalating Middle East tensions drive up pump prices for US consumers blows a hole in the entire theory of energy dominance," said Jason Bordoff, a former Obama energy policy adviser and founding director of Columbia University's Center on Global Energy Policy. "The US remains vulnerable to global oil price shocks regardless of how much we produce and how much we import."

Goldwyn said that despite US supply growth, the US is not a swing supplier, nor is it immune to geopolitical disruptions.

"It reveals that energy dominance is a myth and collective energy security remains the norm," he said. "We can't do it by ourselves."

The US imported about 876,000 b/d of Saudi oil in July, up about 81,000 b/d from July 2017, according to the latest EIA monthly data. The US imported 881,000 b/d of Saudi crude in the week ending October 5, according to EIA's latest weekly data. US imports of Saudi crude have fallen from a monthly peak of 2.24 million b/d in May 2003, but Saudi Arabia still accounts for the second biggest source of foreign crude for US refiners, behind only Canada.

In July, 15 US refineries imported Saudi crude, including the 280,000 b/d imported by the Saudi state-owned Port Arthur refinery in Texas. The 600,000 b/d refinery is the largest single refinery in the US and is run through Saudi Arabia's US subsidiary, Motiva Enterprises.

Goldwyn said that despite the rhetoric over the weekend, he expects Saudi Arabia to increase oil output in the near term, since withdrawing barrels from the market as the US pushes for strict compliance with Iran sanctions would undermine its policy goals for Iran.

Trump on Monday gave little indication that he was weighing harsh penalties against the Saudis, telling reporters that Saudi King Salman bin Abdulaziz al-Saud denied any responsibility in Khashoggi's disappearance.

US Secretary of State Mike Pompeo left for Saudi Arabia on Monday as part of a "prompt and open investigation" of Khashoggi's disappearance, the State Department said.

-- Brian Scheid, brian.scheid@spglobal.com

-- Edited by Annie Siebert, newsdesk@spglobal.com