Saudi Arabia Thinks OPEC+ Is Central Bank of Oil—Fire The Banker!

Saudi Oil Minister Prince Abdulaziz bin Salman recently said that OPEC+ is the central bank of oil, and that he feels good about the increase in oil prices since April.

I’m glad that someone feels good because the truth is that OPEC+ has done a dreadful job of managing world oil markets over the last three-and-a-half years. Markets have been over-supplied 79% of the time and there have been two major oil-price collapses since production cuts took effect at the beginning of 2017. 

If that’s how a central bank performs, I would fire the banker!

When OPEC+ announced production cuts in November 2016, inventories had already fallen about 25% from peak levels in March of that year (Figure 1). Markets were balancing themselves and didn’t need help from the central bankers of oil.

Because of anticipated cuts, prices increased 20% in November and December from about $45 to $54. Higher prices led to a production surge and inventory builds that contributed to much lower prices by June.

This image has an empty alt attribute; its file name is image-55.png
Figure 1. Oil over-supply 79% of time and 2 major price collapses
since OPEC+ production cuts took effect in 2017.
Over-supply had already declined 25% when cuts went into effect.
Source: EIA and Labyrinth Consulting Services, Inc.

To make matters worse, OPEC+ was responsible for much of the over-production that led to the late 2018 price collapse, and was at least partly responsible for the 2020 price collapse.

OPEC+ members ramped up production beginning in April 2018 in anticipation of U.S. sanctions on Iran oil exports. When Donald Trump reneged on those sanctions, prices collapsed to the lowest level since June 2017.

The producer consortium was powerless against Covid-19 and its effect on the global economy, but the group’s failure to reach agreement to continue production cuts at its early March 2020 meeting is what sent oil prices into free-fall. Covid-19 finished the job later in the month.

It is absurd to call what followed a price war because no one was buying any oil with plummeting global demand. President Trump offered Saudi Arabia and Russia a convenient way to save face following this debacle. In April, OPEC+ announced “historical” production cuts of almost 10 mmb/d which formalized what markets had already done for them.

“When they look at prices over the quarter, when they look at green shoots of demand pick-up, I think they feel good.”

Helima Croft, head of commodity strategy at RBC Capital Markets

Prices have increased to about $40 per barrel since the historical cuts in April. So, the latest OPEC+ achievement is a return to the lowest price levels since the depths of the early 2016 collapse of world oil prices.

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