Oil Prices Rise After Saudi Arabia Says OPEC+ May Cuts Production
OPEC stands ready to cut output to correct a recent oil price decline driven by poor futures market liquidity and macro-economic fears, which has ignored extremely tight physical crude supply, OPEC’s leader Saudi Arabia said on Monday.
Saudi state news agency SPA cited Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman as telling Bloomberg OPEC+ has the means and flexibility to deal with challenges.
On concerns about a slowdown in the Chinese economy and a possible recession in the West, oil prices have fallen in recent weeks from as high as $120 per barrel to about $95 per barrel.
After Russia invaded Ukraine and the West retaliated by imposing harsh sanctions on Moscow, prices surged earlier this year to just below an all-time high of $147 per barrel, sparking concerns about the greatest energy supply crisis since the 1970s.
Prince Abdulaziz was quoted as saying 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.
He also was quoted as saying prices were falling based on “unsubstantiated” information about demand destruction and confusion around sanctions, embargoes and price caps, which have been proposed by the United States on Russian oil.
According to Prince Abdulaziz, a new agreement between OPEC+ partners beyond 2022 would be beneficial. However, risks of supply disruptions held true and a global spare capacity cushion was extremely low.
“Soon we will start working on a new agreement beyond 2022,” he said, without giving details.
Brent crude prices pared losses on the news and were trading down 1.4% at $95.40 by 1720 GMT, having earlier slipped to as low as $92.36.
The Organization of the Petroleum Exporting Countries and allies led by Russia, a group known as OPEC+, agreed to increase output by 648,000 bpd in each of July and August as they fully unwind nearly 10 million bpd of cuts implemented in May 2020 to counter the COVID-19 pandemic.
The group agreed earlier this month to raise production quotas by another 100,000 bpd in September as it faced pressure from major consumers including the United States which are keen to cool prices.
Only Saudi Arabia and the United Arab Emirates are believed to have spare capacity and the ability to increase production in a meaningful way.
But Prince Abdulaziz pointed to thin liquidity and extreme volatility taking focus away from the issue of spare capacity.
“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.
By msn, August 29, 2022