When Opec member Saudi Arabia pledged in May to do “whatever it takes” to defend world oil prices, it didn’t expect the market to be testing its resolve just one month later.
As the Organisation of the Petroleum Exporting Countries extended oil production cuts, oil prices fell 18% in just 20 days.
Opec members appear determined not to rush into deeper output curbs despite market pressure.
Oil traders have chosen to ignore bullish news for prices — including a long-awaited decline in US oil stocks on Wednesday — and focused instead on negative factors such as a stubborn global glut.
As a result, the oil market posted its worst performance in the first six months in two decades effectively signalling its refusal to accept the effectiveness of the Opec statement and its desire for further production cuts.
The “whatever it takes” pledge was made by Saudi Energy Minister Khalid al-Falih at a meeting in Kuala Lumpur in early May, echoing a promise by European central banker Mario Draghi five years ago during his successful fight to defend the euro.
“You cannot fight the Federal Reserve but you can fight Opec,” said Bob McNally, President of the Rapidan Group, a Washington-based energy market and policy consultant. “Somebody at Opec has to cut further but no one is willing.”
The oil price decline and Saudi’s ability to defend prices also puts in the spotlight on Saudi Arabia’s future king, 31-year-old Prince Mohamed bin Salman, who on Wednesday was made next in line to the throne by his father King Salman.
Prince Mohamed has been the ultimate Saudi energy decision-maker in the last two years and his strategy has shifted from orders to raise oil production to defend Opec market share to curbing output to prop up prices.
Al-Falih and other Opec ministers and officials have said the group would not rush to deepen production cuts from the current 4% to arrest the price decline. They said the group would rather wait until existing joint cuts with non-Opec Russia finally result in a global stocks decline during the third quarter when demand for crude oil is usually strong.
Opec and Russian sources also told Reuters there were few signs the group is preparing any extraordinary action ahead of a joint ministerial monitoring committee meeting in Russia at the end of July.
“We are in discussions with Opec members to prepare ourselves for a new decision,” Iranian Oil Minister Bijan Zanganeh said on Wednesday. “But making decisions in this organisation is very difficult because any decision will mean production cuts for the members,” he added.
An oil price surge at the end of the last decade and the start of this one spurred multiple oil production projects around the world, including from US shale formations, resulting in global oversupply which sent prices tumbling from $120 per barrel in 2014 to below $30 per barrel last year.
Opec and Russia tried to stabilise prices with cuts at around $50-$60 per barrel, but this week Brent prices fell towards $44 per barrel on persistent oversupply worries.
Traders and investors have raised their bets that the oil price will remain under pressure.
The US crude options market shows that the largest change since the Opec meeting in holdings of derivatives maturing in December this year is in put, or sell, options at $45 a barrel.
Open interest, which shows the number of contracts that are open that have been traded but not yet liquidated, has risen by more than 5,000 lots in the last month to nearly 38,000 lots, equivalent to 38 mn barrels of oil.
“Global supply outages have fallen to a new low not seen in years. US shale is returning at full force...(and there are) high storage levels afloat and on land,” said Oystein Berentsen, managing director for oil trading company Strong Petroleum.
The US is not part of any supply reduction deals and is expected to increase production from shale formations by up to one mn barrels per day or almost 10% of the country’s total crude output.
Berentsen said that unless Opec deepened cuts or there was a large, unexpected production stoppage, prices will remain low.
“A deeper cut could arrest the price decline but Opec needs to actually do it rather than just talk about it,” said Greg McKenna, chief market strategist at futures brokerage AxiTrader.
Opec sources have said that one of the options could be to include sooner rather than later Opec members Nigeria and Libya in output cuts after their production grew steeply in recent months from levels previously depressed by unrest.

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