Saudi Arabia has cited volatility and thin liquidity as reasons for sending erroneous signals to oil markets and said the OPEC+ has the means to face such challenges through various means, including curtailing production at any time and in different forms.
Prince Abdulaziz bin Salman, Saudi Minister of Energy, also said the organization would soon start working on a new agreement beyond 2022, which will be more effective than before.
“Volatility and thin liquidity send erroneous signals to markets at times when clarity is most needed,” Prince Abdulaziz told Bloomberg in an interview.
“OPEC plus has the commitment, flexibility and the means within the existing mechanisms of the ‘Declaration of Cooperation’ to deal with such challenges including cutting production at any time and in different forms as has been clearly and repeatedly demonstrated in 2020 and 2021,” Prince Abdulaziz said.
Describing the current state of the market, Prince Abdulaziz said the paper oil market has fallen into a self-perpetuating vicious circle of very thin liquidity and extreme volatility undermining the market’s essential function of efficient price discovery.
This has also made the cost of hedging and managing risks for physical users prohibitive.
“This has a negative impact on the smooth and efficient operation of oil markets, energy commodities and other commodities creating new types of risks and insecurities.”
Prince Abdulaziz pointed out that this vicious circle was amplified by the flow of unsubstantiated stories about demand destruction, recurring news about the return of large volumes of supply, and ambiguity and uncertainty about the potential impacts of price caps, embargoes and sanctions.
The Saudi energy minister said the current volatility was detrimental to the market because without sufficient liquidity, markets can not reflect the realities of the physical fundamentals in a meaningful way.
In fact, it can give a false sense of security at times when spare capacity is severely limited and the risk of severe disruptions remains high.
“The paper and physical markets have become increasingly more disconnected. In a way the market is in a state of schizophrenia, and this is creating a type of a yo-yo market and sending erroneous signals at times when greater visibility and clarity and well-functioning markets are needed more than ever to allow market participants to efficiently hedge and manage the huge risks and uncertainties they face,” Prince Abdulaziz said.
The Saudi minister said OPEC plus has experienced a much more challenging environment in the past and has emerged stronger and more cohesive than ever.
“Witnessing this recent harmful volatility disturb the basic functions of the market and undermine the stability of oil markets will only strengthen our resolve.
“Soon we will start working on a new agreement beyond 2022 which will build on our previous experiences, achievements and successes, ” Prince Abdulaziz said, adding that they were determined to make the new agreement more effective than before.
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