Global Oil Market is in need of a compass. Or is greed at the core?

Oil markets are going for a showdown, as not only crude oil prices are soaring, but also the US dollar. While oil prices have soared by 30% in the last quarter, supported by continuing demand growth, dark clouds are building up on the horizon. 

Not only are major economies heading for a possible severe recession, especially in Europe, but inflation and interest rates are still not cooling down. To put even more pressure on all, news has emerged that China’s future crude oil demand could be peaking soon, even though the latter is still not confirmed and could be a media hype put in place by Beijing to cool down all to get lower prices overall.

Still, signs are on orange, even for most bulls. Looking at equity markets, results are worrying already as they are in deep red. When looking at crude oil prices in general, OPEC Kingpin Saudi Arabia’s move to unilaterally cut an additional 1 million bpd from the market, on top of the already official OPEC+ cuts, has pushed all into a  bullish environment not seen before. 

Analysts are currently trying to assess the willingness of the Saudi minister of energy Prince Abdulaziz bin Salman to continue his market management strategies for much longer. 

Without any real opposition building up inside of OPEC, as most member countries are reaping a windfall they didn’t expect in reality, and Riyadh’s compatriot Abu Dhabi is able to stay happy for now, the only real factor of concern is Moscow. The latter however is battling on several fronts, so crude oil prices for Russia, which are way above the much-taunted G7 oil price cap, are also not a concern at all.  From a practical side, OPEC+ members will continue their current production strategies for longer, as VLCCs full of cash are lining up in their ports.

Riyadh’s policies always have been diffuse, or multi-interpretable, hard for Western analysts to understand fully. The current hardline approach taken by Prince Abdulaziz has surprised the market. The willingness to confront not only major consumer nations, such as the USA, but also the ability to keep most frogs in place, is a new phenomenon in the market. No one can foresee when a real change is going to happen. Media reports currently are hinting at a possible change in Riyadh, largely based on the upcoming JMCC and OPEC meetings next week. 

Looking at current crude oil prices, which could be hitting $100 per barrel before the end of 2023, some expect that Saudi officials could be willing to open up to larger export volumes. To expect however this to happen in the next week is asking for a major disappointment, as there are no signs of demand destruction or even a negative fallout of high crude oil prices yet. Even the toxic combination of higher crude oil prices and US dollar exchange rates has not yet taken a bite out of demand at all. 

Some are seeing signs that OPEC members are getting worried, especially related to a so-called anemic global economic activity. On which basis these assumptions are being based is however unclear, while energy and product demand is even taking major bites out of global storage volumes. Even record levels of US and Canadian crude oil and shale oil production, as reported in the last weeks, have had no impact on prices. Iran’s ongoing oil export push also did not result in lower price settings.

There is no muted demand seen worldwide, even though some emerging markets are worried about their own financials. Global growth is not hit severely, however, and if the first reports of lower inflation rates in major OECD countries are right and continue, even a minor recession will not dent demand growth even further.

After Saudi Prince Abdulaziz's former “Lala Land” statements it now seems he is taking a John Fonzarelli (The Fonz) approach, just staying cool, while markets are getting worried. The Saudi Fonz is not yet willing to change his country’s unilateral management of markets, as price levels are not high enough to really bite. 

With price hovering around $95 per barrel, threatening to break $100 barriers, it seems that a real technical analysis of Riyadh’s assessments could be indicating a ‘breaking point in strategy’ not before $120 per barrel.  As long as oil inventories in the USA, as reported by the EIA/API, continue to fall, market power is in the hands of King Oil Saudi Arabia. 

At the same time, you could say that Saudi Arabia has been able to set up a new oil market management system, not OPEC+ but COPEC+, which includes China. The latter currently is part of Riyadh’s market management approach as Beijing keeps not only demand at wanted levels but also somehow controls price levels by managing its own demand-supply situation.

By regulating demand lately, Beijing has become a material instrument of Riyadh’s strategy, as China keeps markets under pressure but also controlled. Any worries about too high global prices or demand destruction seem to be managed by a hotline between Riyadh and Beijing in the last months. 

As China doesn’t want to be confronted by too high price levels it regulates its own import volumes, but at the same time also pushes products into the market. For Riyadh, the situation is very profitable, without even having to act again.  On the sidelines, the OPEC+ Russian factor is also contributing, Riyadh can manage market volumes, while Moscow gets its hard-needed currency. Putin is currently smiling, as Russian crude gets a very high premium in the market. India currently is paying $20 per barrel above the Western price cap, while China does the same.

To expect OPEC to change in this environment is wishful thinking. Next week’s OPEC meeting will be a paper exercise, with a lot of mediagenic statements but no real results. For Saudi Arabia to act, or surprise the market, it will take a bit longer. Prince Abdulaziz’s current Happy Days’ Fonz strategy is clear, be cool, reap the financial rewards, and milk this geopolitical cow until it's dry.

To factor in a Saudi change in attitude is not functional, as demand destruction or negative economic fall-out is not yet imminent. For Riyadh, the current situation is too positive to change, as it is reaping the financial rewards of its current position from all sides. Not only are hydrocarbon revenues, which are the main government income, very high, but the Kingdom’s attractiveness for investments and cooperation is also growing again. 

After a short period of worries about the fledgling economic growth of the Kingdom, the sun is again shining brightly. What analysts also need to look at is that current price settings are also positive for other OPEC members, such as UAE, Kuwait, Iraq, and even Iran. All need trillions of US dollars to pay for their ongoing staggering investment and economic diversification plans.

The Saudi Fonz however is already planning a surprise. Before the first demand destruction reports emerge, Saudi oil will be flooding into the market. Even Saudi Crown Prince Mohammed bin Salman has indicated before that Riyadh will be acting if the market needs it. 

The latter, for both Saudi power brokers, means not to be pro-active to support global consumers, but to prevent overall lower income generation for the Kingdom. A possible production increase will be hovering above the market, but the timing is up to Saudi royalties, not Western analysts or hedge funds.  There are still major IPOs planned in the Gulf region or a possible Aramco share offering!