Opec sings the same old song, just with new lyrics

Saudi Arabia's Energy Minister Prince Abdulaziz Bin Salman Al Saud is no slouch when it comes to moving the oil market. A few well-chosen words and a hint of output cuts to come – and Brent is back above $100 a barrel within little more than 24 hours. But I am puzzled by his most recent logic.

The minister appears to be laying the blame for oil's retreat from its recent highs on the very same people his predecessors blamed for past moves in the opposite direction. The most likely truth is that the kingdom just wants higher oil prices.

This is what he 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 are not enough people trading in the futures markets for oil. That is an odd thing for a Saudi oil minister to suggest. Who does he want to be more active in trading oil futures?

For most of the 30 years that I have been following Opec and the oil market, the group has complained that "speculators" have been driving oil prices whenever they move too far, or too fast, in one direction. That group includes everyone who trades in oil futures without ever intending to supply, or take delivery of, physical barrels of oil.

Far from having too many speculators driving price moves that are not justified by the physical market, the lament now seems to be that there are too few speculators, or maybe just too few who are bullish.

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

ABS, as the oil minister is widely known, goes on to say that these illiquid paper markets "can give a false sense of security at times when spare capacity is severely limited and the risk of severe disruptions remains high."

If I understand what he is saying, this means: The physical oil market is much tighter than is suggested by the paper markets that generate the headline Brent and West Texas Intermediate crude prices. 

The prince's solution to this failure to recognise the true tightness of the physical market is to suggest that the producer group might cut production, thereby tightening the physical market even further. The Saudi Press Agency, in its reporting of the Bloomberg interview with ABS, even made the threat of output cuts its headline.

But I fail to see how cutting output in a supposedly tight market can possibly be in the interest of stability. If the market is already short of physical crude supplies, cutting them further is just going to make the shortage worse.

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

From early December, crude prices rose by 86%, peaking in March. But apparently the market was stable enough then for the Opec+ producers to stick doggedly to their slow and steady increase in production targets. After the surge triggered by Russia's invasion of Ukraine, Brent crude then stayed above $100 for almost the entire period between early March and the beginning of August.

But that appearance of stability is deceptive. Crude prices moved by more than $5 a barrel in a day 20 times in the past year, 19 of those were during that period, the other was the day in November when the omicron variant of Covid-19 hit the headlines. 

Then, at the start of August, Brent dropped from $110 a barrel to $92 in a little over two weeks, a fall of 16%. That drop has been enough to elicit the veiled threat of output cuts – a call that has been faithfully echoed by most other members of the oil producer group.

Of course, as my colleague Javier Blas pointed out, ABS's words may have very little to do with market stability and very much to do with putting a floor under oil prices in a market that is worrying more about the prospects of recession in several major oil-consuming countries than it is about the adequacy of oil supplies.

Simply put, the Saudis want higher oil prices and, as always, they are putting the blame on "speculators," or their absence, for a market they do not like the look of.

Julian Lee is an oil strategist for Bloomberg First Word. Previously he worked as a senior analyst at the Centre for Global Energy Studies.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.