Saudi Arabia Is Taming Oil Backwardation

Analysts have warned that failure to reach a deal concerning crude oil output would mean that oil will continue to act as a runaway train, as even slowing demand growth would still also continue to squeeze the world’s spare capacity.

Oil prices rallied on Tuesday while Saudi Arabia is warning that OPEC+ could cut production. Iran remains among the most significant cards in the energy sector.

How a lower production volume is supposed to restore the balance between the futures market and the physical market is still not obvious. Possibly, Saudi Arabia wants to prepare for a scenario in which the US agrees to a renewal of the nuclear agreement with Iran, allowing the latter to return to the global oil market.

The fact that Saudi Arabia appears to regard an oil price of around $90 as too low could be seen by speculators as an invitation. When oil futures trade at lower levels than spot prices and near-term futures, that is known usually as backwardation and it has been a recurrent topic in 2022 that has seen Saudi Arabia warning that OPEC+ could cut production to narrow a gap between high prices in the physical oil market and weaker futures prices.

The Saudi comments have sent the spot price higher on the day. At the time of writing, WTI is trading at $93.60, up 3.32% but of the highs of $94.19.

Saudi oil minister Prince Abdulaziz bin Salman told Bloomberg News that OPEC+ could cut production when the group next meets to raise prices. However, the wild card in the oil market stays with Iran. When it comes to the potential Iran deal, no news has been good news.

Energy traders have grown increasingly skeptical of the legal and political risks associated with a potential resolution.

After all, the clock is ticking for a resolution that has the potential to drive a continued and substantial erosion of supply risk premia, but a potential resolution appears plagued with legal and political risks which distort the crude oil outlook.