On Saturday, OPEC+ agreed to extend its current production cuts for one additional month, but on Monday oil prices dropped. What happened? Essentially, Saudi Arabia got what it wanted out of the OPEC+ videoconference this weekend, and then the Saudi oil minister (perhaps unintentionally) made the oil prices fall by giving imprudent answers at a Monday morning press conference. But, in truth, Saudi Arabia’s doesn’t really care that the prices dropped a little on Monday. Here’s Why:
Saud Arabia entered Saturday’s videoconference with one main objective. It wanted to get a very short-term deal so that Saudi Aramco could raise the prices for which it sells oil in July. The production cut deal that was proposed and agreed upon is for the shortest possible time period, only one month. However, this was enough to do the trick for Saudi Arabia, which then promptly issued Aramco’s official selling prices (OSPs) for July at rates that were, in some cases, $6 higher than last month’s prices.
On Monday morning, OPEC+ held a press conference at which the Saudi and Russian oil ministers answered reporters questions via videoconference. When asked about how the organization would compel Iraq to comply with production cuts this time around, the Saudi oil minister, Abdulaziz bin Salman, did not provide confidence to the market. The answer, when pressed, was that much time had been spent discussing “full conformity” and that the countries that did not fully comply with cuts in May and June would be expected to compensate in July, August and September. When asked if Saudi Arabia would be continuing its voluntary cuts beyond June, Prince Abdulaziz said no. Oil prices started dropping shortly thereafter.
This is a great lesson in the difference between the prices of oil on the exchanges and the actual prices at which oil companies sell their product. Aramco does not sell its oil based on the price you see on the ticker. It sets its own prices, informed by the exchanges and agreed upon with a purchaser. The Saudi oil ministry may want higher oil prices, but he does not care about the trading price on a given day as much as an oil trader behind a terminal does.
(Note: in Saudi Arabia’s case, the government does care about the price of Brent for another reason. The Brent price is used to determine royalty payments made by Aramco to the government, so a higher Brent price means slightly higher government revenues).
