OPEC+ ‘Equipped to Deal with Challenges,’ Can Cut Output if Required: Saudi Minister

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Saudi Prince, Abdulaziz bn Salman has said that volatility and thin liquidity negatively impact oil market.

According to him, oil if it is equipped to deal with the challenges in the volatile crude market and can also cut production if required.

Quoting the minister in a report on Monday, Bloomberg said the 23-member group, led by Saudi Arabia and Russia, has emerged “stronger and more cohesive than ever” amid the “challenging environment.”

“OPEC+ has the commitment …….and the means within the existing mechanisms of the Declaration of Co- 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,” he said.

It will be recalled that OPEC+ agreed earlier this month to September output by a much slower 100,000 barrels per day, amid continued price volatility caused by fears of a recession that could dent crude demand.

Oil prices have remained extremely volatile this year. Brent, the global benchmark for two thirds of the world’s oil, nearly touched $140 a in March, shortly after Russia’s military offensive in Ukraine — now entering its seventh month — and the subsequent sanctions imposed by the US and the UK on the of Moscow’s crude.

However, oil has given up most of its gains since then amid mounting concerns over the possibility of a looming recession hitting fuel demand globally.

Last month, the International Monetary Fund (IMF) lowered its growth forecast for the global economy to 3.2% this year, from its previous forecast of 3.6% in April.

This was based on factors such as Russia’s war in Ukraine, high inflation and the Covid-19 pandemic.

Oil prices remained volatile on Monday, slumping in early trading, then paring losses before dipping again. This was largely a reflection of a tight market, growing concerns about a slowdown in demand in and the possibility of Iranian crude coming back to the market.

Brent was trading 0.7% higher at $97.16 a at 8.08am UAE time on Tuesday. West Texas Intermediate, the gauge that tracks US crude, was down 0.59% at $90.23 a barrel.

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

The “extreme volatility” and the “thin liquidity” prevailing in the oil market have also adversely affected the smooth operations of the industry and led to increased risks and uncertainty, he said.

A thin liquidity refers to a market characterised by a smaller number of buyers and sellers but a high price volatility.

These factors have undermined the market’s “essential function of efficient price discovery and have made the cost of hedging and managing risks for physical users prohibitive”, he said.

It has also negatively affected commodities, creating new types of risks and insecurities.

“This vicious circle is amplified by the flow of unsubstantiated stories about demand destruction … return of large volumes of supply … and uncertainty about the potential impacts of price caps, embargoes and sanctions,” Prince Abdulaziz said.

Volatility is detrimental because “without sufficient liquidity, markets can’t reflect the realities of the physical fundamentals in a meaningful way and can give a false sense of security at times when spare capacity is severely limited and the risk of severe disruptions remains high”, he added.

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