The IEA: A champion of sustainable errors

The Saudi energy minister's words can also serve as advice for speculators in the futures markets who may forget that there is also a real-world component of the oil market, with prices driven by clearer conditions, known as fundamentals.

Here, it is in no one's interest for the market to collapse as it did in April 2020, when the price of West Texas Intermediate crude crossed into negative levels.

There's no objection to futures traders making profits. But there should be due respect for market fundamentals because we all live in one world where all economies are affected when oil markets are shaken.

Physical v futures markets

In physical commodities markets, oil is sold in measurements known as barrels to refineries for immediate delivery and subsequent processing into the fuels on which the world depends.

Futures markets are different. There, bets on prices on specific dates are made by speculators, which can be a useful tool to hedge risk in terms of exposure to prices.

Futures prices are determined by the supply and demand, not of oil itself, but by the volume in trading of futures positions. This means this part of the market can be sensitive to forecasts and speculation.

Over the past weeks, there has been a significant decline in the purchase of futures on the Nymex platform: transactions fell to less than 400,000 contracts amid fears of economic recession. This prompted hedge funds and money managers to liquidate their oil positions at one of the fastest paces in the past three years.

Futures contracts covering more than 200 million barrels of oil were sold as fears over the economy took hold at the sharpest pace since April 2020,  when worries about the onset of the Covid-19 pandemic took WTI futures prices negative.

That unusual move came in defiance of tighter conditions in the physical market, mainly influenced by fears about the impact on demand of the economic slowdown. A tightening of supplies in the physical market, which would usually support prices, came as futures continued to fall.

Stocks of oil in OECD countries, a club of richer nations, were lower at the time, by about 253 million barrels year-on-year and about 312 million barrels under the five-year average.

The latest OECD commercial oil inventories data in March 2023 show 195 million barrels, which is higher compared to the same time a year ago. Interestingly, this figure is nearly close to the 200 million barrels that were withdrawn last year from US strategic stocks, according to data from the US Energy Information Administration.

Futures trading has an important role, including acting as a mechanism to price wider factors that may show through on energy markets and wider financial exchanges, such as rising interest rates or the potential turbulence recently over the US debt ceiling.

But it should not run too far from the real-world factors of supply and demand that drive the fundamental part of an energy market that keeps the global economy moving.