Saudi minister’s bullish comment, supported by the allies tightened markets

On August 22, the Saudi Energy Minister Prince Abdulaziz bin Salman hinted at a production cut as soon as the September 5 OPEC Plus ministerial meeting.

The minister  suggested that OPEC Plus is willing to make explore various mechanisms including new production cuts to restore connection between illiquid paper and volatile physical markets.

Several OPEC Plus members have supported the proposal. No view on when or how considering OPEC Plus already lag its allocated target by 3 million barrels per day.

In addition, the uncertain oil supply outlook and a sharp rebound in gasoil/diesel refining margins also lent support to oil prices and Brent levels are recovered and now higher than $100/Bbl. level again.

To illustrate this disconnect, the difference between spot prices and futures prices reached $8/Bbl. in July 2022. This implies physical market is disconnected from paper market.

The drop in market liquidity is driven by several factors including higher margin calls, elevated hedging costs, and higher cost of financial exposure, all exacerbating market volatility, which in turn affects liquidity.

Money managers remain active in the futures market amid strong market fundamentals. Should market volatility retract to acceptable levels, money managers will likely increase their market positioning and trading volume will most likely rise.

Preliminary reports of low refinery runs in China during July will continue to limit the country’s export capacity and keep the Asian oil product market tight.

High natural gas prices will continue to incentivize gas-to-oil fuel switching in Europe in the weeks and months to come amid limited gas supply availability ahead of the winter heating season.

Expectations for another rise in US interest rates by the Fed to combat inflation are likely to further support the recently strengthening US dollar, which could limit oil price increases in the near term.

The main bearish supply stem from apparent movement in the indirect nuclear deal discussions between the USA and Iran, which could result into additional volumes of crude onto the market. Besides, ongoing recession fears in the West as well as new concerns about China’s economic outlook for the rest of 2022.

However, markets are faced with facts that are currently overlooked and not being addressed correctly which is the structural supply weakness influenced by years of underinvestment. That in turn have led to limited spare capacity causing the risk of sever disruptions to remain high, thus making more volatility in the market. This need to be addressed by stimulating financial instruments  to ensure adequate supply in the market, which will certainly help secure stability and security of demand.

Despite weakening global economic outlook, demand continues to grow but at slower base. In fact, demand will be supported by soaring oil use for power generation and gas-to-oil switching which are boosting demand besides the seasonal basis as the upcoming winter season push for more demand for heating.

According to FGE, if natural gas prices remain well above oil product prices this winter, Total of 650,000 barrels per day of gas-to-oil switching. Of this about 150,000 barrels per day is in refining, 380,000 barrels per day in power generation and 120,000 barrels per day in industry. About 200,000 barrels per day of additional demand will come from Europe and 300,000 barrels per day from Asia. Of course, an economic slowdown could undercut part of this potential increase, so the uncertainties are pronounced.

Crude prices have been given a lift largely due to the comments this week from Saudi Arabia, but that will be clarified on 5 September OPEC Plus meeting.

Therefore, short of any major supply outages possible given the hurricane season for the USGC prices could remain within hovering around $100/Bbl.

• Mohammed Al-Shatti is a Kuwaiti oil analyst.