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Oil Markets Await New OPEC+ Agreement

By Ellen WaldCommoditiesAug 25, 2022 10:42
uk.investing.com/analysis/oil-markets-await-new-opec-agreement-200533221
Oil Markets Await New OPEC+ Agreement
By Ellen Wald   |  Aug 25, 2022 10:42
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Saudi oil minister Prince Abdulaziz bin Salman shook oil markets on Monday with comments to Bloomberg News. His written comments, which are somewhat cryptic, can be found in their entirety on the Saudi state news agency website.

Prince Abdulaziz seems to enjoy keeping market analysts and traders guessing as to what his statements mean, but there are some elements traders can pay attention to.

When trying to understand what his statements mean for oil production and markets, it is important to keep in mind that in the past Abdulaziz has not been pleasant towards traders. In fact, he calls them, “speculators”. In September 2020, he warned against gambling on the oil market and promised that those who did bet on oil prices would face a jumpy market and would be “ouching like hell”.

The comment from his (written) interview on Monday that most media outlets and traders seemed to zero in on was the following:

“OPEC+ has the commitment, the flexibility, and the means…to deal with such challenges and provide guidance including cutting production at any time and in different forms.”

This seemed to indicate to market watchers that OPEC+ is mulling production cuts. As a result, oil prices rose 4% in trading on Tuesday.

However, it is important to understand the context in which these comments were made. Prince Abdulaziz was discussing some of the issues he sees in the current oil market, which he described as “schizophrenic”. Specifically, he was referring to what he seems to think has been extreme volatility of late, along with “very thin” liquidity and a growing disconnect between the paper and physical markets.

He believes that this distortion and high volatility is “sending erroneous signals at times when greater visibility and clarity and well-functioning markets are needed more than ever.…” This is making it especially difficult for producers to hedge their production to effectively manage risk.

Essentially, he believes that issues like “unsubstantiated stories about demand destruction, recurring news about the return of large volumes of supply, and ambiguity and uncertainty about the potential impacts of price caps, embargoes, and sanctions” are making the market more volatile and causing the paper market to move farther away from the realities of the physical market. His point was that he believes OPEC+ can respond to real issues in the physical market by adjusting production—both up and down.

Ironically, in mentioning a potential OPEC+ production cut, Prince Abdulaziz (perhaps intentionally) caused the exact kind of news-cycle-based volatility he sees as problematic for producers trying to manage risk. Later on Tuesday, several OPEC sources said that the group is not discussing production cuts at this time and that any cuts would likely be contingent on the return of Iranian oil to the legal oil market.

However, the market seems to be stuck on the idea that OPEC+ is moving towards production cuts. This was reinforced by a statement from the Kuwaiti oil minister that echoed Prince Abdulaziz’s comments about oil markets on Wednesday. He said that OPEC+ has many mechanisms to respond to market volatility, “including cutting production at any time and in different forms as has been clearly and repeatedly demonstrated in 2020 and 2021.”

However, traders should not assume that OPEC+ is even considering production cuts at this point. Yet, as OPEC+ does start to put together a new agreement for 2023 and beyond, traders should keep in mind that a perceived lack of spare capacity in the market is a major factor driving volatility.

If OPEC+ cut production, there would be more spare capacity in the market and OPEC+ members would have room to increase production to respond to events like wars, natural disasters, sanctions, or other production outages. This might help stabilize oil prices, but it would likely put the market at a higher price than is good for consumers.

OPEC+ cannot fix the disconnect between the paper and physical markets on its own. However, the group could help the issue by aligning its members’ production quotas with the actual amount of oil members can produce. (In other words, OPEC+ could decrease production quotas to align with what the countries are actually producing, since many are producing well below quota). This would look like OPEC+ is cutting production, when in fact it is merely realigning its quotas with the physical capabilities of its members. Traders should look for moves like this as OPEC+ begins considering its agreement for the next year.

Oil Markets Await New OPEC+ Agreement
 

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Oil Markets Await New OPEC+ Agreement

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Waqas Ali
Waqas Ali Aug 26, 2022 12:18
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