Surprise OPEC+ production cuts were aimed at one audience: speculators who believed that oil prices would drop.
This is a return to the strategy Prince Abdulaziz bin Salman, Saudi Energy Minister, used in 2020. He famously stated that he wanted “the guys on the trading floors to get as jumpy and as excited as possible” and promised that anyone who gambles on the market would be “outching like hell”.
The new attack against short sellers was successful. The market was wrongfooted, and oil futures rose as high as 8%, revaluing assets from bonds to equities. OPEC+ caught consumers and global economy in the middle of the action, raising concerns about inflation and prompting bets for further interest rate increases.
According to people familiar, the Organization of Petroleum Exporting Countries (OPEC+) began to recognize the need to change their oil policy on March 20. This was after Brent crude fell to a 15 month low of $70 per barrel. The drop came as the banking crisis threatened to cripple the economy. According to people, Saudi Arabians acknowledged that short sellers are due to be reminded of the pain OPEC+ still inflicts on them.In a matter of days, the decision to keep more than 1,000,000 barrels of oil off the market was made. It was a tight circle. Some delegates claimed they discovered the news just days before the announcement. Two officials claimed they were totally blindsided by this decision.
This was because Prince Abdulaziz repeatedly stated that the group would maintain output constant throughout the year in order to keep markets stable.
People said that the announcement made on Sunday afternoon in Europe, when markets were closed, was chosen to have maximum impact. Brent rose more than $6 per barrel as Asia woke up, marking the largest move in over a year.
Delegates explained the decision by pointing to market data about the increase in short-selling.
In response to the financial crisis that hit in March, prices fell and speculators piled up bearish positions on US crude oil to the highest level in four years. This reduced bullish positions to their lowest levels in over a decade according to figures from CFTC.
Although financial fears eased towards the end of the month, and short positions were reduced, the people reported that the Saudis still felt nervous. Fears of financial contagion were sparked by the hastily arranged takeover Credit Suisse Group AG.
The kingdom became more worried about oil demand as evidence showed that there was plenty of supply. A legal dispute between Baghdad and the Kurdish region government prompted the closure of an important export pipeline from Iraq in March. This cut off about 400,000 barrels per day of global supply. One person said that crude oil rose only 4%, strengthening the belief that bearish speculators dominated the market.
Amrita Sen, director for research at Energy Aspects Ltd, stated that “the market had become a field for these shorts” which is why OPEC+ wanted them to leave. Producers group says “Take us on, but your own risk.”
Political implications also arise from the OPEC+ battle with short-sellers. This brings the majority of the group in line with Russia, who initiated the unilateral production cuts in Feb with a 500,000 barrel-a day reduction as a retaliation to international sanctions.
These curbs have not yet been fully implemented and their positive effect on prices has been erased due to the banking crisis. With OPEC+ member countries joining the fray, oil revenue that fuels the Kremlin’s war machine, will be bolstered.
The Saudis had to consider how this decision would affect Washington’s relationship, which has been severely strained by Washington’s refusal to accept American requests for more oil. The White House and US consumers could join the short sellers and “ouch like hell” if $100 crude is brought back into production.