A rally that pushed oil prices higher than just before the pandemic hit has failed amid the uncertainty surrounding OPEC + and a stronger dollar.
Hedge fund oil buying reflected the changing fate of oil, turning from net buyers to net sellers in the six most popular oil and fuel contracts, Reuters’ John Kemp reported in his latest weekly column. That put an end to 15 consecutive weeks of buying, Kemp noted.
In addition to the obvious factors affecting oil prices, such as the upcoming OPEC + meeting that could result in an agreement to boost production, dampening prices, there was one new factor: the potential for deteriorating relations between the US and Saudi Arabia.
The Biden administration released a report last week involving the Saudi government in the murder of journalist Jamal Khashoggi, which would be enough to weaken bilateral relations, especially after the federal government announced sanctions against a former senior Saudi intelligence officer who allegedly involved in the murder and the Kingdom’s rapid intervention force.
“Those involved in the horrific murder of Jamal Khashoggi should be held accountable. With this action, the Ministry of Finance is sanctioning Saudi Arabia’s rapid intervention force and a senior Saudi official directly involved in the murder of Jamal Khashoggi.” said Finance Minister Janet Yellen.
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But more sanctions could come, and these could target none other than the de facto ruler of Saudi Arabia, Crown Prince Mohammed, according to a Reuters report. The report quoted a UN human rights investigator as saying it was “extremely dangerous” on Washington’s part to have named Mohammed as involved in the murder, but without sanctioning him.
This is where the danger to oil prices actually lies. If the US federal government decides to step out of this “extremely dangerous” situation and impose sanctions on the Saudi Crown Prince, the Kingdom’s response would be to threaten the US with flooding of the oil markets. While we are in the world of speculation, Saudi Arabia may want to resist the shock reaction, but given that there is little else it could do if US sanctions hit the highest levels of government, it will likely wield the oil gun.
Of course, this could be exactly why Washington has not yet sanctioned Prince Mohammed and may not have sanctioned him at all. Despite President Biden’s green energy agenda, the oil and gas industry is a major contributor to GDP and an equal employer: more oil and gas bankruptcies will hardly be welcome to Washington.
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Beyond the world of speculation and in reality, OPEC + will meet later this week to discuss manufacturing. Total production from the expanded cartel fell last month thanks to the deeper Saudi cuts, but these are now over, so production should start to increase this month. The question is how high it would rise: the AFP reported earlier today that internal tensions are running high in OPEC + and may flare up during the meeting.
“The priorities are known: Russia wants to return to normal production as soon as possible, while Saudi Arabia wants to benefit from high prices for a little longer,” said Bjarne Schieldrop, chief analyst at raw materials research firm Seb.
While the oil world awaits Thursday’s rally and its outcome, Congress approved President Biden’s $ 1.9 trillion stimulus program and sent it to the Senate. Although not yet finally approved, it has been passed by Congress and has strengthened the US dollar, which typically negatively impacts oil prices. Fears are also growing that fuel demand growth in China is slowing. Still, we have a growing chorus of economists ahead of us who expect a rapid recovery in the US economy, which would boost demand for oil, to counteract all the factors that pressurize oil.
By Irina Slav for Oilprice.com
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