Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman Al-Saud doesn’t talk about moving the oil market. A few well-chosen words and a sign of impending output cuts—and Brent went above $100 a barrel within a little more than 24 hours of his statement. But I am puzzled by his most recent argument.
The minister appears to be placing the blame for oil’s retreat from its recent highs on the same people his predecessors blamed for past moves in the opposite direction. The most likely truth is that the state just wants higher oil prices.
This is what al-Saud said: “The paper oil market has fallen into a self-perpetuating vicious cycle of very thin liquidity and extreme volatility.” What that means is that there are not enough people trading in the futures markets for oil. It is a strange thing for the Saudi oil minister to suggest who he wants to be more active in oil futures trading?
For most of the 30 years I’ve been following the Saudi Arabia-dominated Organization of the Petroleum Exporting Countries (OPEC) and the international oil market, the group has complained that “speculators” are driving up oil prices whenever they go too far. , or very rapidly, in one direction. That group includes all those who trade in oil futures without intending to supply physical barrels of oil, or to take delivery.
Due to price fluctuations by many speculators that are not justified by the physical market, the lament now appears that there are very few speculators, or perhaps very few who are bullish on crude.
Perhaps the Saudi energy minister wants to see more oil producers trading in paper markets to hedge their output and give a more accurate reflection of market fundamentals. Perhaps the world’s largest oil producer, Saudi Aramco, will only want to move forward by starting to use the futures markets.
ABS, as the oil minister is widely known, said these liquid paper markets could “give a false sense of security at a time when spare capacity is severely limited and the risk of serious disruption remains high.”
If I understand what he’s saying, he means: The physical oil market is much tighter than suggested by the paper markets that generate Brent and West Texas Intermediate crude oil prices. The Saudi prince’s solution to this failure to recognize the true tightness of the physical market is to suggest that the producer group may cut production, making the physical market even tighter. The Saudi Press Agency, in its reporting of the Bloomberg interview with ABS, also made its headline the threat of output.
But I fail to see how cutting production in a tight market could possibly be in the interest of sustainability. If the market is already short of physical supplies of crude, reducing them further will make the shortage worse.
Have global oil markets suddenly become more volatile? Wouldn’t suggest price movements over the past year.
Since the beginning of December, crude oil prices have risen 86%, having peaked in March. But apparently the market was stable enough for OPEC+ producers (which include non-OPEC members, most importantly Russia, in addition to the 13 countries that had previously joined hands) to maintain their slow and steady increase in production targets. But hold on.
After a surge caused by Russia’s invasion of Ukraine on 24 March 2022, Brent crude remained above $100 for almost the entire period between early March and early August. But that form of stability is deceptive. Crude oil prices have risen more than $5 a barrel in a day 20 times over the past year, 19 of them during that period, the other being November when the Omicron version of Covid made headlines around the world.
Then, in early August, Brent fell from $110 a barrel to $92, down 16% in two weeks. The decline is enough to address the hidden danger of cutting production – a call that has been faithfully echoed by most other members of the oil producing group.
Of course, as my colleague Javier Blass pointed out, ABS’s words may have little to do with the stability of the market and much to do with the market putting a floor below oil prices that has led to many major oil downturns. More concerned about possibilities. It is about the adequacy of oil supply compared to consuming countries.
Simply put, Saudi Arabia wants higher oil prices and, as always, its leaders are blaming “speculators”, or their absence, for a market they do not like.
Julian Lee is an oil strategist for Bloomberg First Word.
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