The writing is on the wall. Saudi should realise oil demand is shifting for good

Saudi Arabia’s energy minister Prince Abdulaziz bin Salman. (Source: Bloomberg)

It’s rarely a good sign when someone starts blaming their woes on short sellers.

The bosses of bankrupt energy trader Enron Corp; American banks and mortgage companies, months before the 2008 credit crisis; fraudulent German payments company Wirecard AG the year before its 2020 collapse. All of them pointed fingers at the connivance of market manipulators. There’s a lesson in that: Almost every time someone blames speculators for the fact that they’re on the wrong side of a trade, it’s a clue that the fundamentals of the situation are in a far worse condition than they admit.

This week, it’s been Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, who has set himself up as the scourge of the shorts. “I keep advising them that they will be ouching — they did ouch in April,” he said at the Qatar Economic Forum in Doha on Tuesday. “I would just tell them: Watch out!”

That’s a none-too-subtle threat that OPEC+ might be considering another surprise output cut. The cartel announced a reduction of more than 1.1 million barrels at the start of April, driving Brent crude to its biggest one-day jump in more than a year. If that was meant to prove the short thesis wrong and show that crude deserved a higher price, however, the victory was short-lived. Brent crude closed at $76.84 a barrel Tuesday, 3.7 percent below its price on the eve of OPEC’s shock announcement. Saudi Arabia, which needs a price north of $80 to balance its budget, can hardly call itself the winner from that episode.

All this scolding rhetoric is another sign that the Middle East’s biggest crude producer is underestimating the way that an accelerating energy transition and short-term economic weakness are squeezing demand for its product. In each instance, Saudi Arabia is failing to listen to what the money is saying.

Consider the long-term picture. The growth of electric vehicles is accelerating, with about one in five cars sold in the fourth quarter of last year either a battery or plug-in hybrid, according to BloombergNEF. Air passenger numbers are finally forecast to return to their pre-pandemic levels next year, but will remain about 20 percent below trend growth of around 4 percent annually, putting a long-term drag on demand. Consumption of gasoline has peaked and road fuel as a whole will soon go the same way, according to the International Energy Agency. Even ships are switching to alternative fuels, leaving petrochemicals the only product set for strong demand growth.

One consequence of this shaky outlook has been falling global spending on new supply. Even Saudi Arabian Oil Co has ramped up expenditure only modestly, in spite of $159 billion in net profits last year and repeated complaints from its chief executive about an investment drought.

It's the actions of Abdulaziz’s own  government, rather than pressure from environmental activists, that’s causing rival producers to hold back. “If I were an investor, would I invest in a commodity where the future price depended on the reliability of the world’s largest suppliers to maintain a limitation on supply?” says energy analyst Philip Verleger.

Then there’s the short term, where blaming speculators for the failure of oil prices to rise looks like the final defense against growing evidence that a promised tightening of the market in the second half of this year won’t materialise.

China, which accounted for almost two-thirds of the increase in oil demand over the past two decades, is facing a troubling slowdown in growth, with manufacturing activity contracting last month and producer prices in deflationary territory. Local output of asphalt — a major source of Chinese oil consumption, accounting for similar volumes locally to jet fuel — has been the lowest since 2017 so far this year as infrastructure spending remains fragile. Crude imports in May are likely to be unchanged from a year earlier, when COVID-19 measures were still in place, according to Bloomberg Intelligence analyst Henik Fung.

The hard truth is that the most damaging thing Saudi Arabia can do to short sellers right now is to agree with them. If Elon Musk wants to punish people betting on a fall in Tesla Inc shares, he should deliver results proving their bearish thesis wrong. If Prince Abdulaziz wants to punish people betting that crude prices will fall because the market is oversupplied, however, he should deliver supply cuts — demonstrating the bearish thesis was right all along.

Saudi Arabia itself is ultimately an oil market speculator, too — and one that has made no secret in the past of targeting particular prices.
Picking fights with short sellers will be ineffectual at best, and counterproductive at worst. It’s no way for the world's pre-eminent oil producer to be behaving.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. Views are personal, and do not represent the stand of this publication.

Credit: Bloomberg