Oil Traders Provoked By Bold Saudi Warning Of Possible OPEC Cutbacks

Meanwhile, Vanda Insights says the crude market is getting softer: File Image/Pixabay

The Organization of the Petroleum Exporting Countries (OPEC) warning that it may have to tighten production due to a disconnect between fundamentals and crude prices caused volatile trading on Monday, but a surprisingly muted settlement.

West Texas Intermediate for September delivery fell 54 cents to settle at $90.23 per barrel, while Brent for October settlement dropped 24 cents to settle at $96.48 per barrel.

Trading was also affected by U.S. president Joe Biden speaking with leaders from France, Germany, and the UK about the possible a nuclear deal with Iran, and China reportedly planning a series of special loans to increase support for its troubled property market – which stoked fears of a potential global economic slowdown.

Prince Abdulaziz bin Salman, oil minister for Saudi Arabia, told media that futures prices don't reflect the fundamentals of supply and demand, and that the situation may require OPEC to dial back production when it meets next month to discuss output targets.

He remarked, "The paper and physical markets have become increasingly more disconnected….witnessing this recent harmful volatility disturb the basic functions of the market and undermine the stability of oil markets will only strengthen our resolve."

In response, Ed Moya, senior market analyst at Oanda Corp., said, "The Saudis just reminded oil markets that they still run the show…..it seems energy traders should prepare for enhanced volatility going forward and that the Saudis may look to do whatever it takes to keep prices supported here."

All that can be said with certainty of fundamentals is that they're getting softer and purchasing patterns are changing, according to Vandana Hari, founder of Vanda Insights, pointing to data showing that buyers in South Korea, India, and China have picked up more than 20 million barrels of crude from the U.S. this month, mostly for arrival in November.

Hari said of OPEC, "Should the Iran deal go through, it would put them even more on their guard, especially if their biggest buyers in Asia are scooping up more long-haul crude."

But market tightness remains a huge concern or many insiders, as witnessed by the diesel crack spread approaching $70 per barrel on Monday for the first time since June, the highest for this time of year in records going back to 1986 (the spread was below $20 the same time last year).

The $70 figure reflects growing concerns over the security of the U.S.'s fuel supply heading into winter, with inventories at their lowest level since 2000.

As for the state of the futures market, Dennis Kissler, senior vice president of trading at BOK Financial, postulated that, "The near-term fundamentals seem more to the bears until we see some positive economic indications either out of the U.S. or China, which is looking unlikely."