June 4, 2023


Prince Abdulaziz bin Salman al-Saudi, Saudi Arabia’s energy minister, has been no slouch in driving the oil market. A few well-chosen words and hints of looming production cuts – Brent is back above $100 a barrel in less than 24 hours. But I’m confused by his logic lately.

The minister appeared to blame oil’s pullback from its recent highs on the same people his predecessor accused of moving in the opposite direction in the past. The most likely fact is that the Saudis simply want higher oil prices.

Here’s what he said: “The paper oil market has fallen into a self-perpetuating vicious cycle of very thin liquidity and extreme volatility.”

What he means is that not enough people are trading oil in the futures market. For a Saudi oil minister, it was a strange thing. Who does he want to be more actively involved in oil futures trading?

For most of the 30 years I’ve followed OPEC and the oil market, the group has complained that “speculators” have been pushing oil prices when they go too far or too fast in one direction. This group includes all those who trade oil futures but never intended to supply or receive physical barrels of oil.

Far from having too many speculators driving price moves that have not been justified by the physical market, the lament now seems to be that there are too few speculators, or too few bulls.

Perhaps the energy secretary would like to see more oil producers trade in the note market to hedge their output and more accurately reflect market fundamentals. Perhaps the world’s largest oil producer, Saudi Aramco, wants to lead the way by starting to use the futures market itself.

The ABS goes on to say that these illiquid paper markets “sometimes give a false sense of security when spare capacity is severely constrained and the risk of severe disruption remains high,” the ABS went on to say.

If I understand what he means, this means: The physical oil market is much tighter than the paper markets that generate Brent and WTI prices would suggest. Prince’s solution to this failure to recognize the real tightness in the physical market is to suggest that the producer group may cut production, thereby tightening the physical market further. The Saudi Press Agency even made the headlines about the threat of production cuts when reporting on Bloomberg’s interview with ABS.

But I don’t see how cutting production in an otherwise tight market could be good for stability. If the market is already starved of physical crude supplies, cutting them further will only make the shortage worse.

Has the oil market suddenly become more volatile? Price action over the past year suggests not.

Crude oil prices rose 86% from early December, peaking in March. But apparently, the market was stable enough at the time that OPEC+ producers could stick to their goal of raising output slowly and steadily. Brent held above $100 for almost the entire period between early March and early August after the surge sparked by Russia’s invasion of Ukraine. But this appearance of stability is deceptive. Crude has risen more than $5 a day 20 times over the past year, 19 of those times during this period, and another one day in November when the omicron variant of Covid-19 made headlines.

Then, in early August, Brent fell 16% from $110 a barrel to $92 a barrel in just over two weeks. The drop was enough to trigger an implied threat of production cuts — a call that was dutifully echoed by most other members of the oil-producing group.

Of course, as my colleague Javier Blas has pointed out, ABS words may have less to do with market stability than with oil prices in a market that is more concerned about the prospect of a recession for several major oil companies Setting a lower limit matters a lot. – Consumers than it is about the adequacy of oil supply.

In short, the Saudis want higher oil prices and, as always, blame “speculators” or they don’t like the absence of this market.

More from Bloomberg Views:

• It’s very, very scary to listen to European power traders: Javier Blass

• $10 gas? do not panic.Here’s another: Liam Denning

• Inflation winners need to help losers: Thomas Black

This column does not necessarily reflect the opinions of the editorial board or Bloomberg LP and its owners.

Julian Lee is an oil strategist at Bloomberg First Word. Previously, he was a senior analyst at the Center for Global Energy Research.

More similar stories are available at Bloomberg.com/opinion

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