Crude future prices spiked on Thursday after OPEC said Thursday that the "worst is over" for the oil market. Front month crude contracts were up 3.08% to $41.22 by 15:09 ET following the optimistic commentary.
Secretary General Mohammad Barkindo said that OPEC is going to continue its oil market management and said the "worst is over." The comments came as OPEC unveiled its annual World Oil Outlook.
Global inventories are currently 220 million barrels above the 5-year average, according to Bloomberg. Regardless, OPEC says it hopes the market will be "very healthy" heading into Q4 2020.
Notably, the upside for oil could just be getting started, as combined Brent net spec exposure is near decade lows, indicating there could be plenty of room for a relatively smooth - and potentially drastic - move higher.
Recall, it was less than 3 weeks ago that we published a report detailing how Saudi Arabia had stepped up its rhetoric, even going as far as to warn oil short sellers not to bet against the price of the commodity. Saudi Energy Minister Prince Abdulaziz bin Salman gave "clear hints" in mid September that there could be a change of direction in production policy forthcoming as the price of oil continued to slide.
He said last month: “We will never leave this market unattended. I want the guys in the trading floors to be as jumpy as possible. I’m going to make sure whoever gambles on this market will be ouching like hell.”
OPEC and its allies said they would be "proactive and preemptive" in addressing the diminishing price, recommending "participating counties take further necessary measures".
Abdulaziz held a meeting last month with a "forceful condemnation" of members who were pumping out too much supply. His ire may have been directed to UAE Energy Minister Suhail al Mazrouei, who attended the meeting. The UAE has been "one of the worst quota breakers" in OPEC+, only making 10% of its pledged cuts for August.
Abdulaziz said at the time: “Using tactics to over-produce and hide non-compliance have been tried many times in the past, and always end in failure. They achieve nothing and bring harm to our reputation and credibility.”
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Meanwhile, OPEC should guard against overproduction and extra exports as was the case early this month when prices fell from $45 to $40 a barrel as a result of additional OPEC+ exports of 1.25 million barrels a day (mbd) and concerns over a resurgent COVID-19 pandemic.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London