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Oil: With Production Weapon in Hand, Saudi’s ‘Dirty Harry’ Threatens Bears

By (Barani Krishnan/ 24, 2023 11:03
Oil: With Production Weapon in Hand, Saudi’s ‘Dirty Harry’ Threatens Bears
By (Barani Krishnan/   |  May 24, 2023 11:03
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  • Saudi energy minister threatens more output cuts and pain for short-sellers
  • Market takes caution in stride though prices surge on U.S. weekly consumption
  • Supply-balance imbalance could tip prices the way of bulls through the summer

“I know what you're thinking, oil bear. You're thinking, ‘Will they hold, or will they cut again?’ To tell you the truth, we aren’t sure ourselves. But this being OPEC, the most powerful cartel in the world that could wipe you clean if you mess with us, you've gotta ask yourself: 'Do I feel lucky?’ Well, do you, bear?”

One could almost visualize the Saudi energy minister standing over the short-seller with a production weapon in hand, issuing the dare. Come June 4, this play on the legend of Hollywood’s Dirty Harry movies could enact itself at the meeting of the Organization of the Petroleum Exporting Countries and its allies.

Abdulaziz bin Salman, the Saudi minister who has enjoyed role-playing fictional tough cop Harry Callaghan since he told oil bears a few years ago to “Go ahead, make my day” — another quip from the Dirty Harry franchise — slipped into the avatar again on Tuesday when he vowed to make short-sellers “ouch” and told them to “watch out”.

Joining a panel discussion at the Qatar Economic Forum in Doha, Abdulaziz initially sounded philosophical when he said speculators in oil, “like in any market, they are there to stay.” Then, he went for the jugular:

“I keep advising that they will be ‘ouch’-ing. They did ‘ouch’ in April. I don’t have to show my cards, I’m not [a] poker player … but I would just tell them, watch out.”

‘Ouch’-ing is Abdulaziz’s favorite expression for the hurt he intends to inflict on oil bears by announcing surprisingly large OPEC+ output cuts. In early April, the alliance with 13 Saudi-led OPEC countries and 10 other oil producers steered by Russia announced a 1.7 million-barrel-per-day cut on top of a prior undertaking to shed 2M barrels daily.

After the April cut was announced, crude prices only increased for two weeks before turning lower over four weeks, erasing some 15%. The earlier reduction fared worse, resulting in just a few days of gains before prices tumbled to 15-month lows in March.

On Tuesday, the threat of even deeper production cuts also resulted in oil markets closing up just about 1%, although they had rallied twice as much earlier in the day.

While crude prices were up again on Wednesday, it was more in response to strong U.S. consumption data and the impact of wildfires on Canadian crude exports to the United States rather than Abdulaziz’s caution against speculators. The Saudi minister may not be striking fear in short-sellers like before when they had a potential U.S. debt default and global recession to worry about, too, said Craig Erlam, an analyst at online trading platform OANDA.

“Actions speak louder than words and traders haven't been overly deterred by his words, despite the group having announced two sizable cuts in the last year that briefly shook the markets,” said Erlam, adding: “Crude remains below the levels of December to early March and then April, but recent momentum has been more bullish.”

These days, according to those in the know, OPEC+ output cuts are typically decided by Abdulaziz himself and his half-brother and Saudi Crown Prince Mohammed bin Salman. The kingdom would also offer to pony up most of the oil that is to be cut, ensuring little resistance from the rest of the alliance.

The whole thing is then dressed up as a larger OPEC+ effort to curtail output and as a show of solidarity when the truth is it is only supported meagerly by the other oil producers who have come to expect a free ride from the Saudis each time.

And the worst of the so-called allies leeching on the Saudi goodwill on cuts are the Russians, who are supposed to be Riyadh’s number one support within the alliance. On paper, Russia is supposed to cut 500,000 barrels per day through the end of the year.

Data compiled by the International Energy Agency, or IEA, however, shows that Moscow’s exports of crude oil and oil products rose in March to their highest level since April 2020, jumping by 600,000 barrels a day.

Moscow’s revenue from petroleum sales — $12.7 billion — is still down 43% from a year ago because it is forced to sell its barrels to a more limited pool of customers who can negotiate greater discounts, thanks to the G7’s $60-per-barrel cap on Russian crude and a raft of Western sanctions imposed since the Ukraine invasion.

The Saudis, on the other hand, have bent over backward to accommodate the Russians within OPEC+ by refusing to join the international community in condemning Moscow for the invasion, aligning instead with pro-Putin nations like China and India.

But the Saudi motivation in supporting Russia isn’t totally altruistic either. Riyadh knows that if Moscow were to exit OPEC+, the alliance would just collapse at this point, and that could even doom the existence of OPEC. Russia still produces about 9.7M barrels of crude per day, just behind the Saudi output of 10.6M.

Bent on winning the Ukraine war at all costs, the Russians are selling their crude at any good price they can get, and the Saudis know better than to try bending Putin to their will. What’s odd is they are also encouraging the Russians to do more of the same thing.

In the first 10 days of March, the Saudis imported almost 2.5 million barrels of diesel-type fuel from Russia, far more than they did at any other time in the last six years, according to Kpler data compiled by Bloomberg.

Vast amounts of diesel, ostensibly of Russian origin but rebranded as “Saudi,” then found its way to Europe, showing how sanctioned oil and fuel products are being rerouted in the global oil marketplace. The Europeans, of course, are well aware of the origins of that Saudi diesel — as much as they are of the recycled Russian energy products sold to them by the Chinese and Indians.

Said John Kilduff, founding partner at New York energy hedge fund Again Capital:

“It’s all about profit and ensuring that no country runs out of the oil it needs. The G7 and the U.S. Treasury know exactly what’s going on but they’re ok with it because their idea is that Putin earns less from selling his oil. He’s still making a lot of money and they wish to cut more of that.”

“What we really need to ask is why oil bulls keep harping on displaced Russian crude as a factor when almost every barrel is getting sold. The global picture of oil is not that demand has grown exponentially; it’s that production has been savaged by OPEC+ in order to create the illusion of a super bullish market. Demand is only where it was four years ago, before the pandemic, and could get only a little better going forth.”

The IEA says that total oil demand this year should stand at 99.7M barrels a day, around 200,000 more than 2019 levels.

In the near term, though, OPEC+ has the upper hand in calibrating the market to its whims, given the typical surge in oil demand seen for air, road, and sea travel between now and the summer.

In the United States alone, the forecast is that there will be 42.3 million road travelers for the upcoming Memorial Day holiday period that runs May 26-29. The 7% year-over-year increase will result in 2.7 million more road travelers than the 39.6 million in 2022.

The impact of all these on crude prices cannot be understated in the immediate term, especially with technicals for both U.S. West Texas Intermediate and U.K. Brent benchmarks looking supportive as well, said Sunil Kumar Dixit, chief technical strategist at He adds:

“WTI crude continues to maintain stability above the strategic zone of $72.70 - $72.20, looking to break above $73.80 to achieve its next targets of $74.60 and $75.50. Meanwhile, Brent is holding strong above $76.70, with potential for a break above $77.80 and further upside towards $78.40 and $78.80.”

Thus, if Abdulaziz Salman and his OPEC+ coterie decide on another production cut on June 4, expect the market to take it a little more seriously than before. However, the impact will likely soften over time as summer travels recede.


Disclaimer: The content of this article is purely to educate and inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.

Oil: With Production Weapon in Hand, Saudi’s ‘Dirty Harry’ Threatens Bears

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Oil: With Production Weapon in Hand, Saudi’s ‘Dirty Harry’ Threatens Bears

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