Saudi Energy Boss Flips Flops Yet Again, Says Oil Fundamentals Have Improved

Friday March 17, 2017

Saudi Arabia, which of late has expressed growing frustration over the efficacy of the Organization of the Petroleum Exporting Countries (OPEC) oil reduction initiative due to overproduction of members and non-members, now thinks fundamentals have improved.

Speaking on Bloomberg television Thursday, Khalid al-Falih, energy minister for the Saudis, stated, "Saudi Arabia is driven by bringing supply and demand into balance, encouraging investment flows, and making sure that global inventories ... are back to where they should be.

"That's where I have my eyes focused on, and of course those factors [can't] be easily managed"; however, he added that "we're on course, I think the fundamentals have significantly improved over the past few months."

He went on to say that "prices will fluctuate up and down, there are other factors in play such as speculators, financial investors who go long or short ... but I think looking at the fundamentals I am quite satisfied that we're in the right direction, and my colleagues from other producing nations have been cooperating with us quite nicely, and we're satisfied we're on track.

"Daily or weekly fluctuations of price don't get my eye off the ball."

When pressed to admit that inventories haven't dropped as much as expected, al-Falih replied, "Transparencies aren't perfect, and it also takes time for inventories to correct; demand in the first quarter isn't the highest, so it's taken time for some of that data to show"; he repeated that "we are on the right track" and that he is receiving full cooperation from other OPEC members.

The minister's remarks are baffling when compared to his behaviour at the CERAWeek conference in Houston barely a week ago: there, he admitted that oil inventories aren't draining as quickly as expected despite the OPEC initiative - even though the day prior he assured media that the cutbacks were having their intended effect.

He also complained that U.S. shale growth is "too fast", and he warned delegates that he has limited patience in bearing the brunt of the cuts on behalf of nations that are either falling behind in their commitments or ignoring them entirely: "Saudi Arabia will not allow itself to be used by others; we will not bear the burden of free riders."

If market performance on Thursday is any indication, al-Falih's latest take on fundamentals is a minority view: Brent settled down 7 cents at $51.74 per barrel (nearly $7 below January's post-deal peak of $58.37), and U.S. light crude settled 11 cents lower at $48.75 per barrel.

It fell upon Matt Smith, director of research for ClipperData, to hammer home what analysts have been repeatedly stating in order to justify their pessimism in the face of media-friendly bafflegab and puzzling about-faces from OPEC members.

Smith told CNBC that rising U.S. production and record high inventories have rendered the highly-touted OPEC cutbacks as irrelevant, "so prices have just kind of thrown in the towel in the last week."

John Kilduff, founding partner of Again Capital, believes a perfect storm is forming that could cause crude to trade below the three month range of between $49.61 and $55.24, with a downside target of $42.

That storm consists of reduced U.S. refinery activity due to seasonal maintenance; al-Falih stating earlier this week that his kingdom will support the OPEC production cutbacks only for a "restricted period of time"; and a lack of cohesion among OPEC members that has done as much if not more as the uptick in U.S. drilling to cause market imbalance.