Reasons for oil traders to closely watch Saudi Arabia

Currently, OPEC and Saudi Arabia are discussing the issues of re-balancing the supply and demand for oil. Are there any reasons for the oil traders to worry?

August 17, AtoZForex – Sometimes simple and well-said words can have a huge impact on the largest organizations or markets. All the eyes were on Saudi Arabia’s energy minister Khalid al-Falih, when he spoke last week. Mr. Falih’s words have sent hedge funds racing to cover large bets against oil prices. The Saudi Arabia’s energy minister’s short speech drove Brent crude 10 percent higher.

Mr. Falih stated that the kingdom was motivated by calls from Venezuela to rethink the idea of freezing output. He said the kingdom was willing to “discuss any possible action” needed “to stabilize” prices on Organization of the Petroleum Exporting Countries (OPEC) ministers’ conference next month at the informal meeting in Algeria.

Could the next OPEC meeting bear fruit?

The previous OPEC meetings, in April and June, the oil producing nations already discussed the possibility of an oil output freeze. Yet, the OPEC members failed to reach an agreement. Hence, the next meeting in late September, could bring oil an output freeze agreement. Considering that the oil-dependent countries are experiencing troubles caused by a two-year price breakdown.

However, the majority of OPEC observers don’t expect any official agreement to appear from the gathering in Algeria. Nevertheless, prices stroke higher at the bare threat of action. The chief analyst at Wood Mackenzie, Ann-Louise Hittle has been positive about these discussions as:

“By raising the possibility of a freeze it can help them get through this period while the rebalancing continues. It’s almost as if there’s an attempt to talk the market through what was always going to be a long process.”

See also: July FOMC minutes expectations

Freezing output or verbal intervention?

Alternatively, analysts predict an attempt by OPEC and Saudi Arabia to verbally interfere in the market during the process of balancing the supply and demand. Considering that Saudi Arabia’s strategy of keeping output high to push out higher cost competitors, is finally showing signs of achieving good results. OPEC production went up to its highest on record, while supplies outside the organization members is expected to go down this year.

Nevertheless, this process is time-consuming, triggering the threats for the oil price in the face of attacks from short-sellers in the period of seasonal surpluses. The latter has happened in refined fuels markets, such as gasoline. Therefore, verbal intervention by OPEC is considered as an option.

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