Oil Spikes After Saudi Prince Hints At Shift In OPEC+ Strategy

For almost two months we have been highlighting the dramatic (and growing) disconnect between physical and paper (futures) markets in the oil sector.

It appears that Saudi Arabian Oil Minister Prince Abdulaziz bin Salman has finally recognized this as an issue.

The implicit leader of OPEC said “extreme” volatility and lack of liquidity in the futures market are disconnecting prices from fundamentals and may force OPEC+ to act.

“The paper and physical markets have become increasingly more disconnected,” he said in response to written questions from Bloomberg News.

While futures prices are tumbling, in the physical realm, inventories of energy and metals continue to fall from already uncomfortably low levels as demand remains above supply in all cyclical commodities, except iron ore. Timespreads, the single most accurate measure of underlying fundamentals, trade at unprecedented levels of backwardation, irrespective of the price sell-off.

Prince Abdulaziz said futures prices don’t reflect the underlying fundamentals of supply and demand, which may require the group to tighten production when it meets next month to consider output targets.

“Witnessing this recent harmful volatility disturb the basic functions of the market and undermine the stability of oil markets will only strengthen our resolve,” he said.

These headlines sent the front-month WTI future rebounding from the ‘Iran deal imminent’ plunge…

As we noted previously, Goldman was all over this disconnect and has been buying every barrel of oil it can find…

“this latest commodity sell-off is completely delinked from physical fundamentals and driven by financial liquidation.”

In a response to questions from Bloomberg, Prince Abdulaziz responded in writing:

Will OPEC+ have to respond?

In OPEC+ we have experienced a much more challenging environment in the past and we have emerged stronger and more cohesive than ever. OPEC+ has the commitment, the flexibility, and the means within the existing mechanisms of the Declaration of Cooperation to deal with such challenges and provide guidance including cutting production at any time and in different forms as has been clearly and repeatedly demonstrated in 2020 and 2021.

Soon we will start working on a new agreement beyond 2022 which will build on our previous experiences, achievements, and successes. We are determined to make the new agreement more effective than before. Witnessing this recent harmful volatility disturb the basic functions of the market and undermine the stability of oil markets will only strengthen our resolve.

Who could have seen that coming?

OPEC Sees Global Oil Market Tipping Into Surplus This Quarter

And here come the output cuts

— zerohedge (@zerohedge) August 11, 2022

But what about the fist-bump?