- August 24, 2022
- Posted by: Art Berman
- Category: The Petroleum Truth Report
Saudi Prince Abdulaziz bin Salman (ABS) said this week that OPEC+ may need to cut oil production. This may be necessary, he said, to correct problems in the market because “the paper and physical markets have become increasingly more disconnected.”
This is rhetorical theater. It has no real basis is fact. But that’s not what this is really about.
This is about the second Cold War to create new world order.
In a written statement to Bloomberg, ABS stated,
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.
–Abdulaziz bin Salman
It is true that volatility has been extreme since the Russian invasion of Ukraine in late February, 2022 but that was nearly six months ago. The worst of the volatility ended in April so the timing of ABS’s comments makes little sense based on oil-market technical concerns.
Liquidity and volatility are inversely related. When volatility is high, investors are reluctant to invest in futures contracts. That’s because the price variance is too high to make manage risk. With limited capital flowing in and out of oil markets, it is difficult to convert an asset/contract into cash. High volatility begets low liquidity.
ABS’s distinction between the futures (paper) and physical (spot) markets does not survive the light of day.
Figure 1 shows Brent futures price (red), futures price volatility (blue) and 2021 average price volatility (dashed blue). Both price and price volatility increased after Russia’s invasion of Ukraine in late February of 2022. Volatility decreased in April but has not returned to the pre-invasion 2021 volatility average.
Figure 2 shows corresponding data for Brent spot price and spot-price volatility. The relationship between Brent spot-price volatility & spot price looks nearly identical to Brent futures volatility and futures price.
Paper and physical markets have not become increasingly more disconnected. They are, in fact, perfectly connected…just not the way that ABS likes.
That’s why the Saudi prince’s comments are theater. That is also the easy part.
The more difficult part is why he make these comments, why he makes them now, and why he was willing to put them in writing for Bloomberg?
Javier Blas made an astute observation yesterday which I dismissed at first.
“To me, his message Monday wasn’t targeting speculators but rather Western policymakers, who are busy trying to suppress prices via a deal with Iran, the release of strategic reserves or a cap.”
It should be obvious by now that Russia’s war in Ukraine is about much more than territorial expansion. Ukraine is the staging ground for a larger conflict between states who are dissatisfied with the present world order versus those countries that are more-or-less satisfied.
We only need to look at the countries that continue to buy Russian oil and cooperate with Russia on oil: China, India, Saudi Arabia and the rest of OPEC including Venezuela, Mexico, Kazakhstan, Azerbaijan, Malaysia, Sudan, South Sudan, Oman, Brunei and Bahrain.
Putin’s chief reason for invading Ukraine was broken promises about the expansion of NATO into countries in Eastern Europe formerly aligned with the Soviet Union. The longer-term conflict in Ukraine has been about the parts of that country that wanted to join NATO and other parts that preferred a relationship with Russia.
The press and public somehow seem to have missed the significance of Putin’s and Xi Jinping’s February 4, 2022 Joint Statement.
“This is a pledge to stand shoulder to shoulder against America and the West, ideologically as well as militarily. This statement might be looked back on as the beginning of Cold War Two.”
—Robert Daly, Director of the Kissinger Institute on China and the United States
The First Cold War was fought for dominance in the new world order that emerged after World War II. Despite the popular focus on the Berlin Wall, the Cuban Missile Crisis and the Vietnam War, the Middle East was the centerpiece of the Cold War.
During the post-war period, the world shifted quickly from coal and biomass to oil. Franklin Roosevelt met with Saudi King Abdul Aziz Ibn Saud in February 1945 to secure U.S. access to oil. The Soviet Union occupied Afghanistan beginning in 1978 as a counter to Iran which was a U.S. ally at the time. The Soviets supplied Iraq with more weapons than any other country during the Iran-Iraq War from 1980 to 1988. Russia supported Egypt and other Arab states in their many conflicts with Israel beginning in 1974.
Today, the world has begun the descending arc of the Oil Age. The Second Cold War is a struggle to dominate remaining fossil resources and new energy sources. Russia is using natural gas supply as a weapon to damage the economies of Europe. Grain and fertilizer exports have been severely reduced since the Russian invasion of Ukraine this year. In addition, Russia and Ukraine are important exporters of uranium and Russia is a leader in nuclear technology around the world.
None of this is coincidence. Vladimir Putin’s PhD dissertation was Mineral and Raw Materials Resources and the Development Strategy for the Russian Economy.
This is the background and context for Price Abdulaziz bin Salman’s comments this week. His message is that Russia’s interests are our interests and the West’s problems are not our problems.