Oil-rich Alaska wary of Saudi power play in battered crude market

Saudi Arabia poses a growing threat to Alaska's share of the oil market after edging out competitors early this year and likely strengthening its grip further during a price war with Russia in the spring.

The sixth-largest oil-producing state, Alaska pumps out about 500,000 barrels of crude per day. About 80 percent of that oil is sent to refineries in California and Washington State with the rest going to Hawaii, though demand has evaporated as the U.S. and countries around the world locked down their economies to curb the spread of the COVID-19 pandemic.

With tankers now lined up off the West Coast waiting for prices to rebound from near-record lows, U.S. Sen. Lisa Murkowski, an Alaska Republican, is working to ensure her state doesn't lose ground to foreign competition while its producers are weakened.

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"I don't want Alaska's oil to be displaced by oil from Saudi Arabia,” Murkowski said on a recent call with reporters.

Ballooning supplies have forced oil prices down 60 percent since the end of last year. Contango, or steepness in the crude price curve, has prompted producers to fill up tankers in the belief they can sell their output at higher prices when the U.S. economy reopens.

Stay-at-home orders designed to slow the spread of COVID-19 have sapped daily demand by 30 million barrels, compounding the effects of a supply glut from the Saudi-Russia price war that strained global storage capacity.

The demand destruction began with the shutdown of Asian markets after COVID-19 was discovered in Wuhan, China. Oil that would ordinarily have been shipped there was rerouted, likely to the western U.S., which was still doing business as usual at the time.

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Imports of foreign oil into Petroleum Administration Defense District 5 -- the region of the U.S. that stretches from Arizona northwest to Alaska -- totaled 1.46 million and 1.50 million barrels per day for the months of January and February, respectively – the most recent for which data was available.

Saudi Arabia accounted for 12 percent and 15 percent of those totals and was the only major supplier that saw its share rise during each of the two months. It likely widened further during March and April.

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“There have been discussions about everything from tariffs to import bans to turning the tankers that are sitting offshore in California and turning them back around,” Murkowski said.

Prices have begun to rally, however, after the world’s largest producers, including Saudi Arabia, agreed last month to cut production by up to 20 million barrels per day to ease the supply glut.

Saudi Arabia said Monday it would reduce its output by an extra 1 million barrels per day, bringing its total output cut to 4.8 million barrels per day. If the cuts are fully implemented, the kingdom will produce about 7.5 million barrels per day.

Murkowski said there needs to be a “constant monitoring” of the agreement to ensure that the agreed-upon cuts “actually proceed and that nobody cheats.”