Oil Rally Stumbles On OPEC+ Uncertainty

A rally that pushed oil prices higher than they were immediately before the pandemic struck has faltered on uncertainty around OPEC+ and a stronger dollar.

Hedge fund oil buying reflected the changing fortunes of oil, turning from net buyers to net sellers in the six most popular oil and fuel contracts, Reuters' John Kemp reported in his latest weekly column. That put an end to 15 straight weeks of buying, Kemp noted.

Besides the obvious factors that affect oil prices, such as the upcoming OPEC+ meeting that could result in an agreement to boost production, which would dampen prices, there was one new factor: the potential for worsening U.S.-Saudi relations.

The Biden administration last week released a report that implicated the Saudi government in the murder of journalist Jamal Khashoggi, which would be enough to sour bilateral relations, especially after the federal administration announced sanctions on a former senior Saudi intelligence officer said to be involved in the murder and the Kingdom's Rapid Intervention Force.

"Those involved in the abhorrent killing of Jamal Khashoggi must be held accountable. With this action, Treasury is sanctioning Saudi Arabia's Rapid Intervention Force and a senior Saudi official who was directly involved in Jamal Khashoggi's murder," Treasury Secretary Janet Yellen said.

But more sanctions may be coming, and these may target none other than Saudi Arabia's de facto ruler, Crown Prince Mohammed, according to a Reuters report. The report cited a UN human rights investigator who said it was "extremely dangerous" on Washington's part to have named Mohammed as involved in the murder but without sanctioning him.

This is where the danger for oil prices lies, really. If the federal U.S. government decides to exit this "extremely dangerous" situation and sanction the Saudi Crown Prince, the Kingdom's knee-jerk reaction would be to threaten the U.S. with flooding oil markets. While we're in the world of speculation, Saudi Arabia may want to resist the knee-jerk reaction, but since there is little else it could do should U.S. sanctions reach its highest government levels, it will probably wield the oil weapon.

Of course, this may be precisely why Washington has not sanctioned Prince Mohammed yet and may not sanction him at all. Despite President Biden's green energy agenda, the oil and gas industry is a major contributor to GDP and an equally major employer: more oil and gas bankruptcies will hardly be welcomed news for Washington.

Out of the world of speculation and into reality, OPEC+ is meeting later this week to discuss production. The extended cartel's total production fell last month thanks to the deeper Saudi cuts, but these are over now, so output should begin climbing this month. The question is how high it would climb: the AFP reported earlier today internal tensions are running high in OPEC+ and might flare up at the meeting.

"The priorities are well known: Russia wants to return to normal production as quickly as possible while Saudi Arabia wants to benefit from high prices a little longer," the AFP quoted Bjarne Schieldrop, chief analyst at commodities research firm Seb as saying.

While the oil world awaits the Thursday meeting and its outcome, Congress passed President Biden's $1.9-trillion stimulus program and sent it to the Senate. While it has yet to receive final approval, Congress passing strengthened the U.S. dollar, which usually affects oil prices in a negative way. Fears are also mounting that fuel demand growth in China is slowing down. Still, on the tailwind side, we've got a growing chorus of economist voices expecting a quick rebound for the U.S. economy, which would boost oil demand, to apply counterpressure to all the factors pressuring oil.

By Irina Slav for Oilprice.com