Report: Storage space under pressure, Saudi Arabia begins oil production cuts

As disruptions to transport through the Strait of Hormuz persist, Saudi Arabia has joined the ranks of countries cutting production.

On March 9, Bloomberg reported, citing sources, Saudi Arabia is cutting crude oil production in response to rapidly accumulating inventories caused by export bottlenecks, to prevent storage facilities from filling up prematurely. Previously, the UAE, Kuwait, and Iraq had taken similar actions. Some oil-producing countries are voluntarily reducing production in order to avoid the risk of being forced to shut down operations completely due to exhausted storage capacity.

The current Middle East conflict has lasted for two weeks, and as one of the world's most important oil transport routes, maritime traffic through the Strait of Hormuz is severely restricted. Oil shipments from Persian Gulf nations have generally slowed, with only Iranian supplies still able to transit the strait normally.

The Strait of Hormuz handles a significant volume of global crude oil transit; impeded passage directly reduces the export capacity of Gulf oil-producing nations and drives international oil prices up sharply. Today, WTI crude and Brent oil prices surged as much as 30% during trading; although gains have narrowed, prices remain firmly above $100 per barrel.

Limited Capacity of Saudi Pipeline Alternatives

As the world's largest oil exporter, Saudi Arabia produces about 10 million barrels of crude oil per day, with exports reaching 7 million barrels. In response to the blockage in the Strait of Hormuz, Saudi Aramco is redirecting some shipments to Yanbu Port on the Red Sea.

However, the pipeline to this port has limited capacity and cannot fully accommodate the previous scale of exports through the strait. This means Saudi Arabia is unable to meet all export needs via alternative routes in the short term, and inventory pressure continues to mount.

Exports Blocked and High Inventories Make Voluntary Production Cuts the "Inevitable Choice" for Gulf Oil Producers

Inventory limits are approaching, and Gulf oil-producing nations face increasingly severe storage constraints.

According to calculations by Antoine Halff, co-founder of geospatial analysis firm Kayrros, the combined remaining storage capacity of Saudi Arabia, UAE, Kuwait and Iraq is slightly over 100 million barrels, about one third of total capacity. However, Halff noted on LinkedIn last week that due to operational constraints, storage facilities often cannot reach their rated maximum, meaning actual available space is tighter and inventory pressure more urgent than headline numbers suggest.

Previously, JPMorgan warned that if export disruptions at the Strait of Hormuz continue, Saudi storage capacity could be exhausted in just over two months. This prospect is prompting the oil producer to proactively cut production to avoid hitting storage limits and a total shutdown.

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