Saudi Arabia resorts to Jedi mindtricks

Saudi Arabia’s oil minister Ali Naimi penned a sharply worded piece in the Financial Times on Thursday declaring that high prices are unjustified because “there is no lack of supply.”

But what does resorting to an op-ed in the Financial Times actually tell us about the kingdom’s position?

Could it be that the Saudis have taken a leaf out of the Fed’s book, an institution also known to have lost  firepower, and resorted to communications as a policy instrument in its own right? That is, when all else fails, resort to Jedi mindtricks: “This is not the supply shortage you’re looking for”.

Olivier Jakob at Petromatrix has had some thoughts on the matter. As he wrote on Thursday:

It used to be that Saudi Arabia produced more oil when it wanted lower oil prices. Today, when Saudi Arabia wants lower prices it produces an op-ed in the Financial Times. The world needs proof of barrels, not words, and Saudi Arabia for now is delivering the latter rather than the former. If you are a large oil producer with spare capacity it is easy to bring prices lower: you produce more, force oil into storage that then force a contango structure that forces the speculators out of the market.

Writing an op-ed is nice but it also shows that you either do not want or can’t produce more. The problem might be that if Saudi Arabia pushes more oil out, then given the tough financial penalties for dealing with Iranian crude oil there will be more countries moving away from Iranian crude oil, and while Saudi Arabia can replace some Iranian crude oil it is much more difficult to replace all the Iranian exports and will also put Saudi Arabia at a greater risk of war with Iran.

Crude oil prices were lower yesterday on the sound-bites of France joining the UK and the US on the idea of a release of strategic stocks. The use of strategic stocks is supposed to be the last bullet and if Western powers are seriously envisaging this then it only shows the lack of commitment they have received from Saudi Arabia to replace the Iranian oil that is falling under the embargo.

Looking at the way Europe has managed the Greek crisis we should now expect a sound-bite about stock releases every day. The odd reality however is that France is currently refilling its strategic stocks of distillates and is expected to buy more during the summer.

It all does seem very counterintuitive. On the one hand Saudi is saying there is no supply shortage and stocks are at record levels. On the other hand it’s sending more crude to the United States. On the one hand you have high oil prices and the constant mumblings of SPR releases. On the other hand much of the analyst and academic community insists there’s no need for any emergency action.

So what is going on?

We’d be pleased to hear from anyone who can make sense of it.

Yours, confused. FT Alphaville.