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Saudis Warn of Risks From Volatile Market

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Prince Abdulaziz bin Salman

Frustration is mounting in corners of the industry about government intervention in oil markets, which some think is undermining efficient price discovery. Saudi Energy Minister Prince Abdulaziz bin Salman expressed concern that the physical and paper markets have become disconnected, in turn prompting extreme volatility in oil futures. Some might argue that he was merely trying to talk up oil prices, which have been sliding since June — taking Brent below $90 per barrel earlier this month. But high volatility and breaks between fundamentals and price movements can pose a risk to commodity markets by creating insecurities and difficulties for traders and industry players seeking to hedge. “The paper oil market is facing a vicious cycle of very thin liquidity and extreme volatility, which in turn is creating a disconnection between the physical market and the futures market,” Prince Abdulaziz told Energy Intelligence in an interview. “This vicious circle is being magnified by the constant flow of unsubstantiated stories about demand destruction, news about the return of large volumes of supply, and ambiguity and uncertainty about the potential impacts of price caps, embargoes and sanctions,” he added. Oil prices have swung wildly in recent months as the market digests the threat to Russian exports from Western sanctions. Moreover, the Biden administration's market interventions, notably a record release of 1 million barrels per day from US strategic stockpiles from April to October, and a steady stream of news on the revival of the Iran nuclear agreement — which would unleash more Iranian oil to the market — have given traders more to think about. The prince stated that energy policy should be long-sighted, and that current distorted market conditions are preventing players from hedging and managing risk — and when this happens, industries can start shutting down. Such an example can be found in Europe, where volatile natural gas prices have made it difficult for industrial users to operate. "In a way the [oil] market is in a state of schizophrenia," Prince Abdulaziz said in a separate interview with Bloomberg.

Topics:
Opec/Opec-Plus, Oil Prices, Crude Oil, Oil Spot Markets, Oil Futures and Derivatives, Oil Supply, Ukraine Crisis
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