Oil Jumps as Saudi Prince Suggests Shift in OPEC+ Strategy Amid ‘Harmful Volatility’ in Markets

Saudi King Salman bin Abdulaziz gives a speech during the first session of the Shura council, from his palace in NEOM, Saudi Arabia, on Nov. 11, 2020. Bandar Algaloud/Courtesy of Saudi Royal Court/Handout via Reuters

OPEC+ is prepared to reduce its oil output in order to deal with a recent decline in the price of crude, due to weak futures market liquidity and macroeconomic fears, while the physical global crude supply remains extremely tight, said Prince Abdulaziz bin Salman, Saudi Arabia’s energy minister, to Bloomberg on Aug. 22. (OPEC+ refers to the original 13 members of OPEC, plus 11 other non-OPEC members.)

Crude prices have dropped in recent weeks, to around $95 per barrel, from its high of $120 in March, as fears of a contraction in the Chinese economy and a recession in Europe and the United States have roiled the markets.

Oil and gas prices skyrocketed after the Russia invasion of Ukraine and the implementation of Western sanctions on Moscow earlier this year, triggering the worst energy supply crisis since the 1970s.

Saudi Arabia and the United Arab Emirates are the only two out of the 23 members of OPEC that currently have the spare capacity and ability to increase oil production to have an effect on the market.

In response to written questions from Bloomberg News, Prince Abdulaziz said that the oil futures market has fallen into “a self-perpetuating vicious circle of very thin liquidity and extreme volatility,” making the cost of hedging and managing risks for market participants prohibitive.

“The paper and physical markets have become increasingly more disconnected,” said the Saudi prince, but that OPEC+ has the means and flexibility to deal with the challenges.

However, “without sufficient liquidity,” said Abdulaziz, “markets can’t reflect the realities of the physical fundamentals in a meaningful way and can give a false sense of security at times when spare capacity is severely limited and the risk of severe disruptions remains high,” noting that the thin liquidity and extreme volatility were also taking focus away from the issue of spare capacity.

Meanwhile, the prince observed that futures prices are currently not reflecting the underlying fundamentals of supply and demand, which may force the oil cartel to tighten production when it meets again in September to consider its next output targets.

“Witnessing this recent harmful volatility disturb the basic functions of the market and undermine the stability of oil markets will only strengthen our resolve,” said Abdulaziz.

He believes that prices were tumbling lately based on “unsubstantiated” information about demand destruction and confusion around sanctions, embargoes, and price caps, which are being proposed by the Biden administration on Russian oil.

“This is a very significant change in tone from OPEC. Are we now discovering what their ideal price FLOOR is???” wrote Eric Nuttall, an energy commentator, in a tweet.

OPEC+ Toys with Oil

OPEC+ had earlier agreed to increase output by 648,000 barrels per day (bpd) in July through August as it fully unwinds nearly 10 million bpd of production cuts implemented in May 2020 during the pandemic.

In early August, OPEC said it would raise its production quotas by another 100,000 bpd in September, after pressure from major consumers such as the United States and its European allies, which are desperate to keep energy prices low.

Prices had fallen earlier in the session after President Biden spoke with leaders from France, Germany, and the United Kingdom about reviving the nuclear deal with Iran, to allow more crude shipments from the OPEC member.

This announcement from the Kingdom of Saudi Arabia may be an ill sign for the leaders in Washington, London, and in Brussels.

Biden visited the Saudi Crown Prince Mohammed bin Salman back in July in a plea with the kingdom to increase global oil production.

But in a snub to the White House, Abdulaziz now says that a new deal in September between OPEC and its partners beyond 2022 will help the organization adapt to the liquidity situation.

“Soon we will start working on a new agreement beyond 2022,” said the prince, without giving details, who said that the risks of supply disruptions remained high and a global spare capacity cushion was very thin.

“We are determined to make the new agreement more effective than before. Witnessing this recent harmful volatility disturb the basic functions of the market and undermine the stability of oil markets will only strengthen our resolve,” said Abdulaziz.

“Don’t fight the Fed or in this case OPEC. Very well done @OPECSecretariat well done. If govts like Europe and North America keep attacking their supply side, you can keep stealing their market share and bring on no incremental production and keep the price at current levels,” wrote Martin Pelletier, a market strategist, in a tweet.

Physical supply tightness may worsen because Kazakhstan’s Caspian Pipeline Consortium is facing more interruptions after damage at two key moorings.

Brent crude prices fell on the news and were trading down 1.4 percent, at $95.40, by afternoon in London, having earlier slipped to as low as $92.36.

West Texas Intermediate futures bounced to about $90 a barrel after earlier trading below $87.

Reuters has contributed to this report.