OIl: What’s Next for Saudi Minister Abdulaziz, the ‘Taylor Swift of Energy’?

Saudi Energy Minister Abdulaziz bin Salman isn’t short of fans. One of them is Eric Nuttall, a Canadian who invests in oil equities.

“His Royal Highness Prince Abdulaziz bin Salman Al Saud is the Taylor Swift of energy: a master of his craft and as the 2nd most powerful man in the energy world after The Crown Prince, quite literally the ‘hottest ticket in town’,” Nuttall gushed in an X (former Twitter) post on Sept. 19 as he stood beside Abdulaziz at an industry event in Calgary, which was attended by the half-brother to the future Saudi king Mohammed bin Salman.

That was before oil's epic selloff in October, which caused long-only investors, or those betting on prices to rise, a loss of between 9% and 12% of their holdings within the first week of the month. It was quite a departure from the time of the Calgary event, when bulls across the energy space were toasting a third-quarter return of nearly 30% on crude prices.

Taking to Twitter again on Oct. 5 — after crude fell a cumulative 8% in just two days — Nuttall reminded anyone disbelieving the bull narrative in oil that “Saudi is in the driver's seat and to doubt their ‘will’ and ‘intent’ would be foolhardy.”

That last bit had been his mantra for a while:  that Abdulaziz’s will and intent — ostensibly in returning crude to $100 a barrel or more via some of the deepest Saudi production cuts in history — is contested only by those clueless about the oil market and where it is headed.

Saudi Minister’s Surprising Take on Oil Demand: It’s Not Great

Abdulaziz, asked for his own outlook on oil, had a different spin. 

Even before the selloff, the minister told the Calgary event that Saudi production cuts were prompted by his doubts about the same oil demand Nuttall had been lecturing everyone on. Abdulaziz rattled off a list of uncertainties — from soft energy consumption in China, the world’s No. 1 crude importer, to the manufacturing slump in Europe and the inflation and rate hike concerns in North America and Europe — as reasons to be worried about oil demand. 

“It’s not about . . . jacking up prices, it’s about making the decisions that are right when we have the data,” he said, explaining the rationale for the cuts. 

Few people in energy consuming countries might have believed Abdulaziz, that price wasn’t a motivation for the Saudis. But hey, not all of us believe the words in Taylor Swift’s songs too, right? If this is the prince of energy pop, then let’s hear it for him, ya?

Thus, the oil market awaits the Saudis’ next move on the world energy chessboard. Many believe it’s a matter of “when” Abdulaziz will respond, not “if”, and you may have heard from him by the time you read this. 

Bulls will particularly appreciate any reassurance from the minister that he has their backs after this market carnage (aside from finances of Saudi Arabia on his mind). Bears will cautiously be waiting as well for a counter strike from the prince, who besides the Swift avatar, has been likened to the oil market’s version of ‘Dirty Harry’ - the maverick cop in those Clint Eastwood films, who plays by his own rules with both criminals and his superiors).

Is the Great Oil ‘Reset’ Coming?

If the Saudis intend to reset the market psyche in oil, an immediate option would be to announce that their joint production cut with Russia, designed to run through the year-end, will now go into 2024 (and maybe infinitely; it’s not only the Federal Reserve which can have higher-for-longer rates, you know .. wink, wink). 

It was the announcement of the combined 1.3 million barrels per day — 1.0 million Saudi and 300,000 Russians — that sent the July to September rally in oil into an overdrive. And it was the absence of any “riders' to that cut that heightened the October selloff when the two principals of the OPEC+ alliance announced there will only be a status quo on production (‘Oh really?’ was the oil market’s response before crude sank 6% that same day).

Notwithstanding that OPEC+ decision, the Saudis have made clear in the past that they will not be shy in removing more barrels from their daily production if it means getting the market “balanced”. (That phrase is their favorite decoy for extracting more money for their oil — considering that OPEC’s total squeeze of 3 million to 4 million barrels per day of regular output already leaves the market anything but balanced).

With the Russian ruble back in dire straits, like how it was in the early days of its Ukraine invasion, the Kremlin will again need to optimize revenues for the war despite the bonanza oil money of the past few months. With their undersupplied domestic fuel market already overstretched (the export ban on that just providing a little relief) it would be right to assume that Moscow will be wanting to add to its oil production in the coming months — not deduct from it. This, of course, means that the Saudis will have to go it alone with any new cuts (Riyadh’s curse, if you will, for its keeping together that thing called OPEC). 

The question is what will it take to restart the rally and bring crude back to $95 a barrel, to reposition the market for three-digit pricing. For a start, Abdulaziz could announce a new symbolic addition of 50,000 barrels per day. But given his perverse thrill for one-upmanship against the oil bears (“Go ahead, make my day”, he dared the short-sellers once in Dirty Harry style), he could make that 100,000-150,000 barrels more of voluntary Saudi reduction. That would give the Russians room to add a similar volume on their side (a development the market will probably not be told, until those barrels show up in the data of Kpler or other cargo trackers).

What If The Saudis Don’t Add to Cuts?

The scenarios I’ve listed make a compelling case for an aggressive Saudi response to the oil selloff. The counter theory is the Saudis do not do anything at all — or anything right away, that is. A delayed response — preempted by an ominous Abdulaziz warning that “we are watching”  — might just scare short-sellers, slow the market slide or may even result in a mini “relief rally” that buys OPEC time to strategize. This might work for OPEC if the demand outlook for oil actually improves in the coming months instead of worsening. 

As of now, some market optics are overwhelmingly in the favor of the bears. US gasoline consumption, for instance, dropped last week to its lowest seasonal level in 25 years after the end of the peak summer driving period, with children back in school and college and families taking fewer road trips. The poor demand showed up most uglily in weekly petroleum data from the government, which reported a gasoline stockpile build of 6.481 million barrels — the single largest weekly rise since January 2022. 

Bulls like Nuttall have front-loaded their arguments with positives too, on why oil would go to $100 a barrel, rather than return to the lows of beneath $70 seen earlier in the year.

Their laundry list includes a 20% year-to-date drop in US oil rig count,  which is a measure of future production; a potential peak in US shale growth this year (with crude prices being where they are, it makes perfect sense to drill now — unless, of course, it is political collusion by the Republican-leaning oil industry against Democrat President Joe Biden);  so-called underinvestment by the supermajors in the game;  global oil inventories at multi-year lows; and the potential for meaningful inventory drawdowns after seasonal refinery turnarounds.

There’s Something Greater Than OPEC — It’s Called the Economy

Beyond all these though is something that may be quite unyielding — the rampant rise in US Treasury yields that were rallying again at the time of writing, after a two-day cool-off in the benchmark 10-year note which spiked to 16-year highs. 

Yields are surging amid one of the worst bond market sell offs in US history as investors persistently seek higher returns for debt held by the government in a time of great uncertainty with inflation and interest rates — despite the economy itself projected by the Atlanta Fed to trailblaze with a near 5% year-on-year growth in the third quarter after a 2.1% expansion in Q2. 

The surge in US yields, predicated by a Fed standing by to add to rates as necessary to moderate inflation, has led to another phenomenon: a dollar at 10-month highs. The combination is dealing a double-whammy to the finances and currencies of other nations, and impacting international demand for dollar-denominated commodities, including oil. 

And as long as the liquidation in US bonds continues, the odds of a global recession occurring, even if the United States spares itself of one, is very real. Oil demand and prices are typically contingent on the global economy doing alright.

Even if, say, both the world and US economies escape a hard landing, the Fed’s going to continue watching inflation like a hawk, to ensure it doesn’t get out of hand like it did after the pandemic. If the Saudis take oil to $100, rest assured that will start showing up in everything from fuel to food and grocery prices. The Fed will respond with higher rates and oil bulls will not like the result of that.

All these proves that there’s something greater than OPEC: It’s called the economy.

I wonder what His Royal Highness plans to do.

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Disclaimer: The aim of this article is purely to inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.