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OPEC Mania Is Back: Will Crude Oil Soar?

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US crude oil

US crude oil (UWTIF) (USO) (OIIL) (USL) (SCO) (DWTIF) January futures rose 5% in the week ending November 18, 2016, on a closing price basis. West Texas Intermediate (WTI) crude oil closed at $43.41 per barrel on November 18—an 0.8% rise from the previous trading session.

US crude oil rose on November 18, 2016, due to the market’s belief that OPEC (Organization of the Petroleum Exporting Countries) members might cut their oil output. Iraq is a major OPEC producer. It’s one of the biggest stumbling blocks to the deal. Iraq said it would make new suggestions to help complete a deal for coordinated production cuts. Earlier, Iraq wanted to be exempt from planned production cuts.

On November 21, 2016, at 1:49 AM EST, US crude oil (UWTI) (OIIL) was trading 1.2% up compared to its closing price on November 18, 2016. If OPEC completed the deal, the strength in crude oil could continue. Earlier in the week, news related to OPEC was the important driver for oil prices.

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Gold last week

Gold futures (GLD) fell 1.3% from November 11 to November 18. The fall in gold prices corresponds to the spike in the US dollar following Trump’s win. The potential effect of Trump’s policies boosted the US dollar. In the trailing week, gold had a correlation of -35% with US dollar. The US dollar rose 2.2% last week.

The gold-to-oil ratio stood at 26.1x on November 18, 2016. On October 10, 2016, it reached 24.5x—its lowest level for 2016. Currently, the ratio is 6.5% above its 2016 low on October 10, 2016. When the ratio is close to its lows, it indicates that market sentiment is towards growth-driven commodities and away from safe-haven assets. Gold is a safe-haven asset. It generally gains during times of economic and financial market uncertainty. Crude oil is a risk asset. It generally gains when economic growth and demand prospects look good.

ETFs

Crude oil–related sentiment also impacts ETFs and ETNs such as the United States Brent Oil ETF (BNO), the PowerShares DWA Energy Momentum ETF (PXI), the DB Crude Oil Double Short ETN (DTO), the iShares US Oil Equipment & Services ETF (IEZ), the Fidelity MSCI Energy Index ETF (FENY), the United States Oil ETF (USO), the Credit Suisse X-Links WTI Crude Oil ETN (OIIL), and the ProShares UltraShort Bloomberg Crude Oil ETF (SCO).

In the next part of this series, we’ll look at how economic data and the US Dollar Index can impact crude oil prices.

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