RIYADH-Saudi Arabia's Minister of Energy, Prince Abdulaziz bin
Salman, said that volatility and thin liquidity send erroneous signals
to markets at times when clarity is most needed.
Saudi Arabia's Minister of Energy Prince Abdulaziz bin Salman Al-Saud attends a session of the Russian Energy Week International Forum in Moscow, Russia October 14, 2021. (Photo by REUTERS).
In an interview with Bloomberg, Prince Abdulaziz pointed out that OPEC+ has the commitment, the flexibility, and the means within the existing mechanisms of the Declaration of Cooperation to deal with such challenges including cutting production at any time and in different forms as has been clearly and repeatedly demonstrated in 2020 and 2021.
Referring to the current state of the oil market, the minister said that the paper oil market has fallen into a self-perpetuating vicious circle of very thin liquidity and extreme volatility undermining the market’s essential function of efficient price discovery and have made the cost of hedging and managing risks for physical users prohibitive.
“This has a negative impact on the smooth and efficient operation of oil markets, energy commodities and other commodities creating new types of risks and insecurities. This vicious circle is amplified by the flow of unsubstantiated stories about demand destruction, recurring news about the return of large volumes of supply, and ambiguity and uncertainty about the potential impacts of price caps, embargoes, and sanctions.”
Reacting to the impact of the current volatility on the functioning of markets, Prince Abdulaziz said that this 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. “Nowadays one need not look far for evidence of this.
The paper and physical markets have become increasingly more disconnected. In a way the market is in a state of schizophrenia, and this is creating a type of a yo-yo market and sending erroneous signals at times when greater visibility and clarity and well-functioning markets are needed more than ever to allow market participants to efficiently hedge and manage the huge risks and uncertainties they face.
Replying to queries about the mechanism of OPEC+ to deal with these challenges, the minister said: “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,” he added.(SG)