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Saudi Arabia’s Energy Minister Prince Abdulaziz Bin Salman Al Saud is not a stumbling block when it comes to moving the oil market. A few well-chosen words and a hint of upcoming production cuts and Brent is back above $100 a barrel in just over 24 hours. But I’m confused by his recent logic.
The minister appears to be blaming the fall in oil prices from recent highs on the same people his predecessors blamed for earlier moves in the opposite direction. The most likely truth is that the kingdom just wants higher oil prices.
Here’s what he said: “The paper oil market has entered a self-perpetuating cycle of very thin liquidity and extreme volatility.”
What he means is that there aren’t enough people trading in the oil futures markets. That’s a strange proposition for a Saudi oil minister. Who does he want to make more active in oil futures trading?
For most of the 30 years that I’ve followed OPEC and the oil market, the group has complained that “speculators” drive oil prices when they move too far or too fast in one direction. This group includes anyone who trades oil futures without ever intending to deliver or take physical barrels of oil.
Far from there being too many speculators driving price moves unjustified by the physical market, the complaint now seems to be that there are too few speculators, or perhaps just too few who are optimistic.
Perhaps the Secretary of Energy would like more oil producers to trade in the paper markets to safeguard their production and more accurately reflect market fundamentals. Perhaps Saudi Aramco, the world’s largest oil producer, wants to lead the way by starting to use the futures markets themselves.
ABS, as the oil secretary is widely known, goes on to say that these illiquid paper markets “can provide a false sense of security at times when spare capacity is severely limited and the risk of serious disruption remains high.”
If I understand what he’s saying, this means the physical oil market is much tighter than the paper markets that generate headlines for Brent and West Texas Intermediate crude prices suggest. The Prince’s response to this failure to recognize the true tightness of the physical market is to suggest that the producer group could cut production, thereby tightening the physical market even further. The Saudi press agency even made the threat of production cuts the headline in its coverage of the Bloomberg interview with ABS.
But I don’t understand how reducing production in a supposedly tight market can be in the interests of stability. If the market is already short of physical crude oil supplies, further reductions will only exacerbate the shortage.
Have the oil markets suddenly become more volatile? Price movements over the past year would suggest that this is not the case.
Crude oil prices rose 86% from early December, peaking in March. But apparently the market was stable enough at the time for OPEC+ producers to stubbornly stick to their slow-and-steady production targets. Brent crude then remained above $100 for most of the period from early March to early August following the surge triggered by the Russian invasion of Ukraine. But this appearance of stability is deceptive. Crude oil prices moved by more than $5 a barrel 20 times in one day last year, 19 of them during this period, the other being the day in November when the Omicron variant of Covid-19 made headlines.
Then, in early August, Brent fell from $110 a barrel to $92 a barrel in just over two weeks, a 16% drop. That drop was enough to prompt the veiled threat of production cuts — a demand faithfully repeated by most other members of the oil-producing group.
Of course, as my colleague Javier Blas pointed out, ABS’s words have very little to do with market stability and very much to do with creating a floor for oil prices in a market more concerned about the prospects of a recession in several major oil markets than the adequacy of the oil supply.
Put simply, the Saudis want higher oil prices and, as always, they blame “speculators” or the absence thereof for a market they don’t like the way it looks.
More from the Bloomberg Opinion:
• Listening to European electricity traders is very, very scary: Javier Blas
• $10 gas? Don’t be alarmed. It’s the other kind: Liam Denning
• The winners of inflation must help the losers: Thomas Black
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Julian Lee is an oil strategist for Bloomberg First Word. He was previously a senior analyst at the Center for Global Energy Studies.
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