There was a bit of a baiting game going on with the newswire headlines from Saudi Arabian Energy Minister Prince Abdulaziz bin Salman. The wire headline was this:
OPEC+ MAY NEED TO TIGHTEN OUTPUT TO STABILIZE MKT: SAUDI MIN
The full text of the interview is out now and that mischaracterizes what he said. His comments largely focused on volatility in the oil market, falling liquidity in the futures market and how futures aren't reflecting the tightness in the physical market.
"This is detrimental because without sufficient liquidity, 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," he said.
Abdulaziz was then asked about cutting production and said this:"
In OPEC+ we have experienced a much more challenging environment in the past and we have emerged stronger and more cohesive than ever. OPEC+ has the commitment, the flexibility, and the means within the existing mechanisms of the Declaration of Cooperation to deal with such challenges and provide guidance including cutting production at any time and in different forms as has been clearly and repeatedly demonstrated in 2020 and 2021.
Soon we will start working on a new agreement beyond 2022 which will build on our previous experiences, achievements, and successes. 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."
There's a mention of cutting production (and it's the only one in the entire interview) but it's hardly a warning and I don't think it's consistent with the headline.
When I look at the big picture on OPEC I wonder: What if they're actually being honest? They're repeatedly warning about a lack of investment and spare capacity. They continually note that more investment is needed to fuel the world. No one is listening.
Aside from low liquidity, what makes it tough for oil companies is that hedging further out isn't a great deal. Prices quickly fall to $80 and with oil companies still trading at discounted multiples, the choice of whether to invest in new production or return capital is an easy one.
In any case, oil fell $4 very quickly on low liquidity earlier today and is now down just $0.30 on the day to $90.47 on this headline. I don't think the headline move is justified but there was no justification for the drop either. It all points to a $6.5 trillion market that's not nearly stable enough.
