Khalid Al-Falih, Saudi Arabia’s energy minister, met in private with some of the world’s top commodity hedge funds in July, taking the unusual step of personally canvassing investor views on the state of the market.
In the past, Saudi Arabian officials have disparaged hedge funds as unhelpful speculators that undermined OPEC’s quest for market stability. Last month’s meetings, described by people familiar with the encounters, signal the world’s largest exporter has reassessed the role of financial investors in the global oil market.
Al-Falih met the oil investors and traders in London days before traveling to St. Petersburg where OPEC and non-OPEC ministers discussed the market, the same people said, asking not to be identified because the talks were private. Although Saudi officials have met in the past with hedge funds representatives, it’s the first time meetings involving the minister have been reported.
Al-Falih met Pierre Andurand, the founder of an eponymous fund with more than $1 billion in assets, and Jonathan Goldberg, the former Goldman Sachs Group Inc. trader who founded BBL Commodities LP, the people said. He also met with traders including Alex Beard, the head of oil at Glencore Plc, the world’s largest commodities house.
Michael Klein, the former Citigroup Inc. investment banker who runs his own advisory firm and is advising on the share sale of giant state oil producer Saudi Aramco, participated in the meetings.
“The Minister is a frequent traveler. As part of his travel schedule, he holds multiple meetings during his trips. We do not disclose the participants of these private meetings nor their content, if and when they happen,” the Saudi Energy Ministry said in a statement. Andurand, BBL and Glencore declined to comment. A representative for Klein declined to comment.
Al-Falih asked the oil traders why the Organization of Petroleum Exporting Countries had achieved only partial success reviving the market and what else the group could do to push prices higher. He also sought views on suggestions from some Wall Street banks that Saudi Arabia should target forward prices to end contango, the market structure where people pay less for oil delivered today than barrels supplied in the future.
Contango has allowed some U.S. shale producers to hedge forward production and lock in profits, making it more difficult for OPEC to wrest back control of the oil market.
To read a story on oil price hedging by U.S. shale producers, click here.
In recent months, Goldman Sachs has been among banks and brokers that said accelerating the end of contango and pushing the oil market into backwardation — when spot prices are higher than forward prices — would deter shale producers.
One way to achieve that would be for Saudi Arabia to start forward sales of its own crude, imitating the Mexican government’s oil hedge program. While Al-Falih sought views on the idea, it’s unclear whether the Saudi minister supports the idea or whether he was simply testing it, according to people familiar with the conversations.
In any case, the funds told the minister that the strategy would likely backfire and lead to lower prices across the whole futures curve, one of the people said.
Shortly after the meetings in London, Al-Falih traveled to St. Petersburg to meet other oil-producing countries. At that summit, the Saudi minister briefed fellow ministers on his conversations with the funds and trading houses, according to the people.
In particular, the Saudi minister told ministers that the people he spoke to considered it key that OPEC focus on oil export levels and not just production.
In public, Saudi Arabia has put on a brave face about the effectiveness of its strategy of production cuts to turn around the market. In December, Riyadh rallied a group of 24 countries to reduce output by 1.8 million barrels a day in an effort lift prices.
The curbs initially worked, boosting Brent crude, the global benchmark, to $54 a barrel in New York in February. But as U.S. shale producers reacted to higher prices pumping more, prices fell again.
Al-Falih has urged fellow OPEC countries to stop undermining the cuts by exceeding their output targets and talking about future expansion plans, according to people briefed on his views.