OPEC’s Output Cuts Buoyed Oil Prices




The impact was almost instantaneous, as WTI crude oil blasted up 8.6%, nearly breaking $50, and energy stocks skyrocketed. Oil and energy-related stocks rallied.

The market was somewhat prepared, as the general consensus among traders was 50/50 as to whether the OPEC members would come to an agreement on the supply cuts.

Energy stocks, especially those of oil & gas exploration & production companies reacted sharply.

The Daily S&P Oil & Gas Exp. & Prod. Bull 3x Shares (GUSH),  and The Daily S&P Oil & Gas Exp. & Prod. Bear 3x Shares (DRIP) reacted sharply to the OPEC announcement.

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As expected, OPEC’s output cuts helped buoy oil prices in a big way. The previous graph shows how oil prices (USO) (BNO) spiked in response to the news of OPEC’s output cuts as investors turned optimistic about the fuel. While West Texas Intermediate prices rose 9.3% in response to the deal announcement on November 30, 2016, Brent crude prices rose 8.8% and the S&P Energy (XRE) (ERX) sector rose 4.8% on the day. Oil prices enjoyed a steady increase in December. Breaching the $60 per barrel level can be expected in 1H17.

The previous graph shows the production cuts that will come into effect starting on January 1, 2017, by OPEC member nations. Indonesia, which recently rejoined the cartel, refused to cut its production growth of 700,000 bpd (barrels per day). It has been banished again. Iran seems to be on sure footing. Most of its production didn’t change. Saudi Arabia would be making the deepest cuts. Its production would be reduced by 486,000 bpd.

OPEC’s agreement is subject to key reductions in the output of 600,000 bpd by non-OPEC members. Russia agreed to reduce production by 300,000 bpd. The deal involves reducing OPEC’s current output by 1.2 MMbpd (million barrels per day) to bring the ceiling to 32.5 MMbpd by January 1, 2017. The duration of the agreement would initially be six months. It could be extended up to six more months depending on prevailing market conditions at the time. Kuwait, Algeria, Venezuela, and two non-OPEC members would form part of the Ministerial Monitoring Committee. It would strive to make sure that the agreement is fully implemented and that all of the members follow its terms.

In the next part of the series, we’ll explore how effective the deal is expected to be in terms of keeping oil prices down by eliminating the supply glut.


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