Last week Saudi Arabia’s Oil Minister said that the large number of short positions on crude have caused prices to fall, even though the market is already rebalancing itself.
This statement immediately led to frantic covering, which pushed prices higher.
This is just the latest confirmation that Saudi Arabia has taken center stage when it comes to oil. Nobody cares anymore about fundamentals, everyone listens to what Riyadh says. If Riyadh is bullish on oil, then oil prices rise, despite any production data that might contradict their words. If Riyadh decides for some reason to be bearish, the market follows.
The extent of this dependency of traders on every word that comes out of Khalid al-Falih’s mouth (and other Saudi officials) becomes all the more evident in light of the latest production forecasts for Saudi Arabia. August production is expected to hit a new high of 10.8-10.9 million bpd, up from 10.67 million bpd in July. Why? Likely so Riyadh has more leverage at the upcoming unofficial OPEC meeting in Algeria. Not that it needs it, now that it is the undisputable tone-setter of the organization.
And here’s another example of how far things have gone: virtually nobody expects the meeting to lead to any sort of agreement to freeze production. In the slim chance it does lead to such an agreement, the Saudi’s record output would indeed provide it with additional leverage: it will be able to continue pumping at the same level. However, the chance is so slim, it’s next to non-existent. Even so, the mere talk about the possibility of a production freeze got traders going long on crude—despite the clear lack of any sign of willingness on the part of Saudi Arabia to cut its output.
Some analysts believe that Saudi officials are simply reflecting the rebalancing of the market. They argue that the market is indeed rebalancing and that next year oil fundamentals will swing into a deficit. Others, such as Goldman Sachs and Morgan Stanley, are not as bullish.
This last oil crisis has made it abundantly clear – supported with scientific research – that you can never be sure where the market will be in a year, let alone longer periods, whatever you do. There are too many variables to be considered. In other words, you can’t trust anyone. Yet, if you’re a trader, you need to have someone to trust, and this someone has turned out to be Saudi Arabia.
Many believe the Saudi tactic of pressuring prices to maintain market share and drive out higher-cost producers is working. And indeed, it is working. There is, however, a question, and this question is: How long will it work?
Unlike Russia and Iran, its greatest foes in the oil arena, Saudi Arabia is not exactly used to economic hardships. It hasn’t experienced serious deficits, if any, in its entire history. Now, it’s going for broke by pumping more and more oil and reducing prices as needed.
This game of output, however, could turn into a game of endurance, if despite all bullish Saudi talk, fundamentals show a different picture. Then someone else will take Saudi Arabia’s place. This won’t really make any big change in oil markets. After all, commodity trading is notoriously vulnerable to forecasts, opinions and rumors, likely as much as it is influenced by actual events and trends affecting supply and demand.