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How Will OPEC’s Production Cut Impact Crude Oil Prices?

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Crude oil prices  

January West Texas Intermediate crude oil futures contracts rose 1.1% and were trading at $50.1 per barrel in electronic trading at 1:25 AM EST on December 1, 2016. The strong dollar, near a 14-year high, could pressure crude oil prices. For more on crude oil prices and OPEC’s meeting, read Part 1 of this series.

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OPEC’s meeting and market doubts

OPEC’s (Organization of the Petroleum Exporting Countries) meeting was held on November 30, 2016. OPEC stated that it will reduce its crude oil production by 1.2 MMbpd (million barrels) for the next six months starting in January. OPEC will limit its production to 32.5 MMbpd. The reduction will remove the current oversupply of 1 MMbpd in the crude oil market. It will support crude oil prices. However, traders are skeptical about how OPEC will implement the production quota system and monitor its members. It’s the first production cut since 2008. In the past, OPEC members produced more than their allocated quotas. Traders are skeptical about how OPEC will enforce the production cut for a longer period of time. Also, a lack of strong demand drivers for crude oil could undo the impact of the cut.

In the meantime, the rise in crude oil prices will see US shale oil producers ramp up their production. Read What Will Happen if the Oil Producer Meeting Succeeds? to learn more. Higher US crude oil prices saw oil producers like Whiting Petroleum (WLL), Oasis Petroleum (OAS), ConocoPhillips (COP), and Marathon Oil (MRO) rise more than 20% in the last month. Higher oil prices will also lead to a rise in non-OPEC crude oil production. It could undo the effects of OPECs market rebalancing efforts. Read How Does Non-OPEC Crude Oil Production Impact Crude Oil Prices? to learn more.

Volatility in crude oil and natural gas prices also impacts funds such as the Vanguard Energy ETF (VDE), the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), the DB Crude Oil Double Short ETN (DTO), the ProShares UltraShort Bloomberg Crude Oil ETF (SCO), the Fidelity MSCI Energy (FENY), the Direxion Daily Energy Bear 3x (ERY), and the Guggenheim S&P 500 Equal Weight Energy ETF (RYE).

In the next part of this series, we’ll see how US crude oil inventories impact crude oil prices.

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