OPEC sings the same old song with new lyrics added

Saudi Energy Minister Prince Abdulaziz Bin Salman al-Saud is no slouch when it comes to rocking the oil market. A few well-chosen words and a hint of production cuts to come – and Brent is back above $100 a barrel in just over 24 hours of its announcement. But I’m intrigued by his latest logic.

The minister appears to be blaming oil’s pullback from recent highs on the same people his predecessors have blamed for past moves in the opposite direction. The more likely truth is that the kingdom just wants higher oil prices.

Here is what Al-Saud said: “The paper oil market has fallen into a self-perpetuating vicious circle of very thin liquidity and extreme volatility. What he means is that there aren’t enough people trading the oil futures markets. It’s a strange thing from a Saudi oil minister: who does he want to see more active in oil futures trading?

For most of the 30 years that I have followed the Saudi-dominated Organization of the Petroleum Exporting Countries (OPEC) and the international oil market, the group complained that “speculators” were driving up prices. price of oil whenever they moved too far, or too fast, in one direction. This group includes anyone who trades oil futures without ever intending to supply or take delivery of physical barrels of petroleum.

Far from having too many speculators driving price movements that are not justified by the physical market, it now appears that there are too few speculators, or perhaps too few bullish Crude Oil speculators.

Perhaps the Saudi energy minister wants to see more oil producers trading in paper markets to hedge their production and give a more accurate reflection of market fundamentals. Perhaps Saudi Aramco, the world’s largest oil producer, would like to lead the way by starting to use futures markets itself.

ABS, as the oil minister is widely known, went on to say that these illiquid paper markets “can provide a false sense of security at times when spare capacity is severely constrained and the risk of severe disruption remains high.”

If I understand what he is saying, that means: the physical oil market is much tighter than the paper markets that generate Brent and West Texas Intermediate crude prices suggest. The Saudi prince’s solution to this failure to recognize the true tension of the physical market is to suggest that the producer group could reduce production, thereby further tightening the physical market. The Saudi Press Agency, in its report on Bloomberg’s interview with ABS, even made the threat of production cuts its headline.

But I don’t see how reducing production in a supposedly tight market can be in the interest of stability. If the market is already short of physical crude supplies, cutting them further will only make the shortage worse.

Have world oil markets suddenly become more volatile? Price movements over the past year suggest not.

Since early December, crude prices have risen 86%, peaking in March. But apparently the market was then stable enough that OPEC+ producers (which includes non-OPEC members, notably Russia, except for the 13 countries that had joined hands earlier) stubbornly stick to their slow and steady increase in production targets.

After the spike triggered by the Russian invasion of Ukraine on March 24, 2022, Brent Crude then remained above $100 for most of the period between early March and early August. But this appearance of stability is deceptive. Crude prices have risen more than $5 a barrel in one day 20 times in the past year, 19 of them in that period, the other was the day in November when the Omicron variant of covid made headlines around the world.

Then, in early August, Brent fell from $110 a barrel to $92 in just over two weeks, a drop of 16%. That drop was enough to prompt the veiled threat of production cuts – a call that was faithfully echoed by most of the other members of the oil producing group.

Of course, as my colleague Javier Blas has pointed out, ABS’ words may have very little to do with market stability and a lot to do with setting a floor for oil prices in a market. who is more worried about the recessionary prospects of several major oil-consuming countries than he is about the adequacy of oil supplies.

Simply put, Saudi Arabia wants higher oil prices and, as always, its rulers are blaming the “speculators”, or lack thereof, for a market they don’t like the look of.

Julian Lee is oil strategist for Bloomberg First Word.

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