‘Prickly prince’ bets on a crude price rally

Hello and welcome back to Energy Source.

Saudi efforts to shock-and-awe the oil market with a big surprise supply cut over the weekend look more like shock-and-yawn a couple of days later. Crude prices held largely steady despite another Saudi pledge to slash output, with Brent settling on Monday at $76.71 a barrel, up less than 1 per cent.

It is the third cut from the Saudis since October as they try to propel a crude price rally in the second half of this year. Will it pay off? That’s the topic of today’s newsletter. And in Data Drill, Derek looks at which stocks are performing better this year: “woke” environmental, social and governance ones decried by politicians on the right, or the fossil fuel producers that enjoyed a bumper harvest in 2022. Anti-ESG warrior Ron DeSantis won’t be happy.

Thank you as always for reading — Justin

Saudis set up an oil market showdown

Saudi Arabia has set up a make-or-break six months for the oil market after committing to another supply cut at the Opec+ meeting in Vienna over the weekend.

Saudi’s oil minister Prince Abdulaziz bin Salman — dubbed the “prickly prince” in the Financial Times’ David Sheppard’s recent story — is now all in on a crude price rally in the second half of this year. The latest reduction in output of 1mn barrels per day for July, and potentially beyond, will bring the kingdom’s production to about 9mn barrels a day. That is the lowest level — outside of the coronavirus pandemic and the immediate aftermath of the 2019 attack on Abqaiq — in more than a decade. The Saudis are trying to wrench global oil inventories lower to buoy prices, although previous supply reductions have not done the job — oil is down more than 20 per cent since the first cuts last year.

Still, analysts widely consider Riyadh’s latest move to be bullish for the oil price. FGE, a consultancy, said the cuts will push the global oil market “firmly into deficit” this summer — meaning supply will not match demand, forcing oil out of storage — and it expected prices to increase “once the market sees evidence of stockdraws in the next few months”.

Goldman Sachs called it “moderately bullish” and said the Saudi cuts on their own could add between $1-6 a barrel to prices this year. It said it took Prince Abdulaziz’s declaration that he would do “whatever it takes” as a sign the kingdom would continue to “leverage its unusually high pricing power”.

But the tepid price response after the attempted show of force from the Saudis and Opec+ gives an early hint at the risks in this latest gambit. Crude prices jumped a bit after news of the cuts on Monday morning in Asia, but settled barely up later in the day in New York.

It’s a sign that oil markets remain focused on iffy global macroeconomic conditions, which Riyadh can do little to overcome. Many will read the cuts as a sign of concern in the kingdom about weak global oil demand.

The ingredients for a widely expected bull run this year — faltering global supply and a big demand boost from China’s post-coronavirus lockdown economy — have not really materialised either.

Global crude production outside Opec has performed better than expected after so much hand wringing about the lack of investment in new supply. While Russia’s production levels have become increasingly opaque in the months since its full-scale invasion of Ukraine, the steady flow of tankers delivering crude to India, China and elsewhere points to stronger-than-expected production, at least until recently. The era of turbocharged supply growth from the US shale patch may have ended, but output is still rising faster than in most other countries. Canada, Brazil and Guyana are also putting new barrels into the market.

All of this raises the risk that Prince Abdulaziz’s big bet backfires, leaving Saudi Arabia once again shouldering the burden of tightening a market. Meanwhile, others — including the UAE, whose Opec quota was increased during the meeting over the weekend — expand at its expense. The 1mn- barrel-a-day cut is temporary and will be re-evaluated, the prince says. But his fixation on teaching Wall Street “speculators” not to bet against Saudi Arabia — to put the “ouch” on the short sellers — could prove expensive if it means the kingdom surrenders market share.

And yet the options in a bearish market are narrow. Further price weakness is itself expensive for the kingdom, especially when Prince Abdulaziz is charged with raising money to fund the revamp of the Saudi economy promised by his half-brother, Crown Prince Mohammed bin Salman. Cutting supply further would send output to historically low levels, while trying to add supply into a weak market would only depress prices.

The problem for Saudi Arabia is that price direction in today’s oil market may be out of its hands. Macroeconomic forces — especially fears of recession and a fall in demand — are more powerful, for now. If they overwhelm the oil market, like they have for the past nine months, the Saudis could find themselves stuck with lower volumes and lower prices — a disastrous outcome for the kingdom. (Justin Jacobs)

Data Drill

Bashing the environmental, social and governance movement on Wall Street has been all the rage lately for politicians of a certain stripe. Ron DeSantis, the governor of Florida who wants to run the US too, for example, has vowed to protect his state from the “woke ESG financial scam”. The goal of this “scam”, he claims, is “to bypass democracy and transform capitalism to serve an ideological agenda”.

Last year, investors seemed to agree. Russia’s war in Ukraine increased fossil fuel prices, sending exchange traded funds representing oil and gas producers sharply higher. Coal producers no longer have their own ETF — but shares in Peabody Energy, the US’s biggest coal producer, soared by more than 130 per cent last year, outperforming even Occidental Petroleum, the S&P 500’s best performer (up 96 per cent in 2022). The misery of an energy crisis in Europe did wonders for anyone producing stuff to burn.

This year, not so much. Peabody’s shares have lost about a quarter of their value this year, and Oxy is about flat. And “woke” funds are outperforming fossil fuel rivals. BlackRock’s flagship ESG fund, ESGU, is soaring — thanks in part to the surge in tech stocks that are major constituents. VanEck’s SMOG, an ETF including companies such as Tesla, wind giant Vestas and NextEra, is following closely behind. By contrast, XOP, State Street’s ETF for US oil and gas producers — and darling of bullish oil bros — is not doing so well. Glencore, the western world’s biggest coal producer, is down about 20 per cent this year.

Power Points

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Energy Source is written and edited by Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg. Reach us at energy.source@ft.com and follow us on Twitter at @FTEnergy. Catch up on past editions of the newsletter here.